India proposes to bring microlenders under central bank regulation, tightening oversight of an industry hit hard last year by a state backlash over complaints of aggressive lending and recovery practices and high interest rates.
Shares in SKS Microfinance , the country's largest and only listed microlender, rose 20 percent on Thursday morning after dropping in early trade, after India's finance ministry posted the draft legislation on its website late on Wednesday.
India's once thriving microfinance was devastated by the crackdown last year by the government of the southern state of Andhra Pradesh, which was the industry hub and largest market. The state rules resulted in a drop off in loan collections and a drying up of funding for microlenders.
The Reserve Bank of India (RBI) subsequently implemented an interest rate cap of 26 percent for most microfinance loans, which sometimes ranged as high as 60 percent.
Shares in SKS, which made a popular initial public offering last year, tumbled in the wake of the Andhra Pradesh rules and trade about 72 percent below their September peak, even after Thursday's rally.
The new nationwide law would require microlenders to get a certificate of registration from the RBI to start operations.
The bill also said any non-bank finance company already in the sector can apply for such a registration within three months from the act becoming operational, as long as it has provided net owned funds of at least half a million rupees ($112,574).
The bill would empower the RBI to set margin caps, repayment schedules and maximum interest rates charged by microlenders, and allow it to issue directions on income recognition, provisioning for bad and doubtful debts and governance.
"This gives us the impetus and the strength which we require," SKS Chief Financial Officier Dilli Raja told a televised media conference.
Fitch Ratings said in May that caps on interest rates and margins as well as tighter loan-loss provisions would have the biggest impact on smaller players, forcing for-profit operators to increase their scale or exit the business.
Shares in SKS Microfinance , the country's largest and only listed microlender, rose 20 percent on Thursday morning after dropping in early trade, after India's finance ministry posted the draft legislation on its website late on Wednesday.
India's once thriving microfinance was devastated by the crackdown last year by the government of the southern state of Andhra Pradesh, which was the industry hub and largest market. The state rules resulted in a drop off in loan collections and a drying up of funding for microlenders.
The Reserve Bank of India (RBI) subsequently implemented an interest rate cap of 26 percent for most microfinance loans, which sometimes ranged as high as 60 percent.
Shares in SKS, which made a popular initial public offering last year, tumbled in the wake of the Andhra Pradesh rules and trade about 72 percent below their September peak, even after Thursday's rally.
The new nationwide law would require microlenders to get a certificate of registration from the RBI to start operations.
The bill would empower the RBI to set margin caps, repayment schedules and maximum interest rates charged by microlenders, and allow it to issue directions on income recognition, provisioning for bad and doubtful debts and governance.
"This gives us the impetus and the strength which we require," SKS Chief Financial Officier Dilli Raja told a televised media conference.
Fitch Ratings said in May that caps on interest rates and margins as well as tighter loan-loss provisions would have the biggest impact on smaller players, forcing for-profit operators to increase their scale or exit the business.
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