SKS shares jump 20%, hit upper circuit

With clarity emerging on the manner microfinance institutions (MFIs) are to be regulated, the shares of SKS Microfinance jumped 20 per cent today, getting locked at their upper circuit. SKS is India's largest and only listed MFI and has been battling weak investor sentiments for quite some time.

On the Bombay Stock Exchange (BSE), it gained Rs 68.50 or 20 per cent to end the day at Rs 411. On the National Stock Exchange (NSE), shares of the Andhra-based entity closed at Rs 411.80, with 3.83 million shares changing hands.

Yesterday, the finance ministry released the draft of The Micro Finance Institutions (Development and Regulation) Bill, which says the Reserve Bank of India (RBI) will have powers to formulate policies for the sector and regulate it.

The bill proposes to empower RBI to issue directions to MFIs on margin caps, tenure of loans, repayment schedules, processing fees, interest and life insurance premia, among others. It will also be allowed to specify the maximum rate an MFI can charge any client.

"This gives us the impetus and strength we require," SKS’ chief financial officer, Dilli Raja, told a televised media conference today. In a note to clients, JP Morgan said the development could be positive for SKS, given the severe operational restrictions it was under due to Andhra Pradesh’s microfinance norms. The foreign brokerage maintains an “underweight” rating on SKS, citing “fundamental flaws” in the business.

SKS made a spectacular debut on the bourses in August last year. And, saw the sentiments taking a U-turn after Andhra Pradesh announced stringent regulations for MFI sector due to allegations on overcharging and coercion in loan recovery. SKS’ shares had touched a high of Rs 1,491 in September 2010; they’d fallen to Rs 262 this May. The impact was severe as Andhra had been the hub for MFIs and the largest market. The immediate fallout was drying of funding for MFI entities.

In a report released in May, Fitch Ratings had said 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.