Mumbai: Tremors originating in the dusty fields of Andhra Pradesh rattled investor confidence in India’s largest microlender.

Share prices of SKS Microfinance Ltd plunged on Thursday, and closed down 19.84% at 640.70, after the company said in a statement to the stock exchanges that its collections have fallen sharply over the last month in Andhra Pradesh, its largest market, where new regulations have forced microfinance firms to move from a weekly to a monthly collection cycle.

SKS said there would likely be a “material impact" on its revenue, profitability and asset quality.

The Andhra Pradesh government has passed an ordinance that seeks to stop microfinanciers from using coercive methods allegedly used by them to recover money, promoting their business at the doorsteps of prospective clients, providing multiple loans to borrowers, and collecting weekly repayments. Microfinance Institutions Network, an industry body, has challenged the ordinance in the state’s high court.

Loading Video...

SKS shares are down 34.95% since they were listed in August and down 52.72% since chief executive officer S.K. Gurumani was controversially sacked on 4 October.

The chief financial officer of SKS tried to assuage fears in a telephone interview on Thursday evening.

“We have a liquidity matrix of cash and cash equivalent that will be sufficient to support the operations for the next three months, including asset growth. We maintain it that way even today. We have absolutely no issues in terms of funding unlike some other players may have in the industry," said Dilli Raj.

Eight banks have released 367 crore to SKS since the ordinance came into effect, including a 75 crore disbursement on Thursday, he added. SKS has also lined up loan sanctions from banks of 2,500 crore, Raj said.

Also See | Reversal of fortune (PDF)

Also Read | The death of a sunrise industry?

A senior SKS official said his firm has been hit by issues facing the entire sector, including the lack of clarity on regulations and operations.

“We are the only listed MFI (microfinance institution) in the country. The uncertainty in the industry is getting reflected on us," said Atul Takle, spokesperson of SKS.

SKS is one of just two listed microfinance companies in the world, and has been a lighting rod for criticism about how profit-oriented microlenders charge high interest rates and encourage poor families to take on more debt than they can service.

An official at a microfinance institution had earlier told Mint that the chances of defaults are higher in a monthly repayment system since poor borrowers usually do not have avenues to keep money aside for a month.

SKS has reduced its lending rate to 24.55% in Andhra Pradesh and plans to lower it to 24% in that state and other markets, it said last week.

“Though we started collection in 97% of the villages starting last Monday, the collection is lower. They (borrowers) are asking what is the need for change. The situation does not look good, but we are hopeful that it will improve," Takle said.

Of SKS’ outstanding loans, 27% are in Andhra Pradesh, which along with Karnataka, Orissa and West Bengal contributes 60-65% of its total business.

Takle, however, said the firm does not face any major difficulties in getting finance from banks. “Banks never stopped lending to us. There are no issues on that side," he said.

SKS said it disbursed 1,048 crore in October.

In its first results announcement since going public, SKS posted a 77% rise in operating income in July-September over the corresponding period last year, to 367 crore. Net profit soared 116%, to 80.50 crore.

Analysts and senior officials in the microfinance industry do not see an immediate solution to the microfinance mess, as state politicians have entered the fray and are even prompting borrowers not to repay loans

“Andhra Pradesh constitutes 27% of SKS’ loan book and to that extent there will be an impact on the company’s loan growth and NPAs. The risk on the NPA is because the issue is political and borrowers of SKS who are not sure about what’s happening may just stop paying the loan because of the uncertainty," said Pramod Gubbi, analyst at UK based investment bank Execution Noble Ltd. NPAs are non-performing assets, or bad loans.

“This political unknown is one risk no business model can overcome and that continues to be a concern. We had highlighted that when we had put a sell rating on the stock after it listed. But now after a 30% fall from the IPO (initial public offering) price, we would recommend investors wait and watch," Gubbi said.

Banks are also fearing large defaults from the sector as they feel that restricted operations could hamper profitability and the ability to repay bank loans. As on 31 March, Indian banks have lent a combined 14,000 crore to 1,659 microfinance companies, according data from National Bank for Agriculture and Rural Development.

“Banks have reduced their exposure to microfinance companies as a precautionary measure, but I think this is only temporary till this issue mellows down. For microfinance companies, banks are the only source of fresh funds. Therefore, they will ensure that defaults do not happen even if it impacts profitability or margins," said Kajal Gandhi, an analyst at ICICI Securities Ltd.

Ravi Krishnan contributed to this story.