Shares of SKS Microfinance, India's largest and only publicly listed lender to the poor, fell by as much as 5 percent after lawmakers in the Indian state of Andhra Pradesh approved legislation to regulate the fast-growing sector.
The legislation, which had been expected to be approved, ratifies an earlier ordinance that has curbed operations by micro lenders in Andhra Pradesh, which had been their largest single market in India.
The move follows tight scrutiny of the fast-growing, largely unregulated, small loans sector after fears of large-scale defaults due to high interest rates and reports of suicides due to mounting debt.
Microfinance lenders in India make loans averaging about $140, mostly to women.
The bill will most likely be signed into law sometime this week, said Alok Prasad, chief executive of trade organisation Microfinance Institutions Network, or MFIN.
"This was a state level political action taken on account of local political considerations. It does not materially alter the position that was existing for the past two months or so," said Prasad, whose group has a petition pending with the state high court seeking changes in the law.
The tighter rules were enacted in October, when the assembly was not in session, in response to complaints over high interest rates, aggressive loan recovery practices and overextended borrowers, and have severely curtailed the activities of microfinance lenders in the state.
Shares in SKS Microfinance, based in the Andhra Pradesh capital of Hyderabad, have fallen by more than half since a late September peak. On Wednesday shares were down 2.42 percent, underperforming the Mumbai blue-chip index.
SKS, backed by investor George Soros, among others, went public in a popular August initial public offering that raised $358 million.
SKS declined to comment.
MFIN, which has as members about 50 for-profit microfinance institutions that account for more than 85 percent of all micro lending in India, has a legal action pending in the Andhra Pradesh High Court.
"We will be proceeding on that with full vigor," Prasad said.
The federal government in Delhi has pledged to regulate the sector, but is also worried about any significant crackdown on lending in the state could backfire.
The Congress party-led coalition government is already fighting a series of battles from corruption allegations to opposition to hiking fuel prices across India.
Andhra Pradesh provides the single largest block of lawmakers for the Congress party and it is already fighting a revolt there over the appointment of a chief minister. The party is also dealing with failing crops due to heavy unseasonal rains in the state.