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SKS Microfinance threatens to sue over loan repayment

Leading micro-lender SKS Microfinance today hinted that it could move the courts if the recent Andhra Pradesh notification prohibiting collection of loan repayments on a weekly basis is not withdrawn.

Leading micro-lender SKS Microfinance today hinted that it could move the courts if the recent Andhra Pradesh notification prohibiting collection of loan repayments on a weekly basis is not withdrawn.

The notification stipulated that the periodicity of repayment by self-help group (SGH) members to MFIs should not be less than a month,even under existing loan agreements.

However,microfinance institutions operating in the state have railed against the move.

“In the event the issue of the repayment periodicity is not satisfactorily resolved,the company may be constrained to challenge the same in the Andhra Pradesh HC,if it is so advised,” the company said in a filing to the Bombay Stock Exchange.

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The ordinance was issued after a spate of suicides in the state,which many alleged was due to the high interest rates and coercive recovery methods adopted by microfinance companies.

SKS Microfinance today announced that it is slashing interest rates on loans in Andhra Pradesh to 24 per cent in the wake of the recent ordinance promulgated by the state government to rein in these lenders. It indicated that a similar step is on the cards for other states as well.

“In AP,the company… shall take steps to further reduce it to effectively 24 per cent. The company is also planning to reduce interest rates in other states to effectively 24 per cent in due course,” SKS said in a BSE filing.

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Just last month,the company had reduced interest rates in AP from over 26 per cent to 24.55 per cent after the state government promulgated an ordinance on October 15 to control the MFIs.

Although SKS did not specify when the new rates would become effective,it said profitability might be impacted as certain provisions of the ordinance require it to change its operation model.

“The proposed change in operating model,disruption in customer connectivity at the field level,the resultant reduction in collection in AP and interest reduction… are likely to have a material impact on the company’s revenues,profitability and asset quality of AP portfolio,” the company said.

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SKS said AP currently accounts for 27 per cent of the company’s total portfolio,but added that it could not immediately quantify the potential impact of the ordinance.

The microfinance giant further said the ordinance has created disruptions in the company’s field operations in AP.

MFIs usually lend money to borrowers through women’s groups in remote areas. They charge interest rates as high as 34 per cent,mostly due to the risk cost of loans in remote areas.

SKS said it was in talks with the state government and key regulators such as the Reserve Bank of India and the Ministry of Finance to rectify aspects of the Andhra Pradesh government’s recent ordinance.

First published on: 10-11-2010 at 05:42:14 pm
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