Microfinance sector's woes haunt bank stocks

Shares of 13 banks fell 0.68% to 4.28% on concerns over their exposure to the microfinance institutions.

At 14:00 IST, the BSE's banking sector index -- Bankex was down 2.17% at 13,910.33. It underperformed the Sensex, which was up 0.10% at 19,885.22.



Axis Bank (down 4.28%), IndusInd Bank (down 4.19%), ICICI Bank (down 3.92%), Yes Bank (down 3.77%), Federal Bank (down 2.52%), HDFC Bank (down 2%), Kotak Mahindra Bank (down 1.79%), Bank of Baroda (down 1.44%), Punjab National Bank (down 1.38%), IDBI Bank (down 1.29%), State Bank of India (down 1.12%), Union Bank of India (down 1.09%), and Canara Bank (down 0.68%), tumbled.

According to reports, ICICI Bank is estimated to have a highest exposure of about Rs 2300 crore to microfinance institutions. Axis Bank has about Rs 1300 crore, HDFC Bank about Rs 1000 crore, State Bank of India about Rs 800-900 crore and Punjab National Bank has Rs 900 crore.

Among the smaller lenders, Corporation Bank has Rs 600 crore, Yes Bank about Rs 400-450 crore and IndusInd Bank Rs 360 crore.

The issue of microfinance lending risk emerged after SKS Microfinance warned that an ordinance enacted on 15 October 2010, by Andhra Pradesh state government on collections could have an impact on its profitability.

The SKS Microfinance management stated that the finance company's collections have come in lower than normal post the Andhra Pradesh government ordinance. This reduction in collection can have material impact on the company's income. It added that the sales, profit and asset quality of its Andhra Pradesh portfolio could be deeply impacted.

SKS Microfinance had earlier announced that it was planning to cut interest rates to 24% across all states, after an ordinance passed by Andhra Pradesh imposed serious restrictions on its business model.

Last month, the Andhra Pradesh government through an ordinance imposed a limit on rates that the industry can charge customers and also curbed aggressive recovery practices following several suicides by borrowers in the state. The state contributes 28% of the current loan portfolio of the company.

According to reports, the government is likely to introduce the Microfinance Bill in the next three-four months. The bill may be introduced in the budget session of parliament.

Microfinance firms typically give loans to small businesses that have no access to banks and charge an effective rate of 28-32% a year, about double the rate on bank loans.

Most of the banks lend to microfinance institutions (MFIs) as priority sector lending. Over the last few days, as MFIs faced these regulatory problems many of the banks stopped lending them, which could create potential solvency problem for MFIs themselves.