India proposes to bring microlenders under the Reserve Bank’s regulation, tightening oversight of an industry hit hard last year by state backlash over complaints of aggressive lending and recovery practices and high interest rates.

Shares in SKS Microfinance, the country's largest and only listed microlender, jumped by their daily limit of 20 per cent on Thursday after dropping in early trade, after India's finance ministry posted the draft legislation on its website late on Wednesday.

"It's incrementally positive for the sector because this will definitely bring down the interference of state governments," said Pankaj Agarwal, analyst at Ambit Capital. "It is good for long-term stability."

The new nationwide law, if implemented, would require microlenders to get a certificate of registration from the RBI to start operations.

The bill also said any non-bank finance company already in the sector can apply for such a registration within three months from the act becoming operational, as long as it has provided net owned funds of at least half a million rupees ($112,574).

The bill would empower the RBI to set margin caps, repayment schedules and maximum interest rates charged by microlenders, and allow it to issue directions on income recognition, provisioning for bad and doubtful debts and governance.

"This gives us the impetus and the strength which we require," SKS Chief Financial Officier Dilli Raja told a televised media conference.

The draft recommendations await parliament's nod, which analysts said could take a while before it becomes a law.

India's once thriving microfinance sector was devastated by the crackdown last year by the government of Andhra Pradesh, which was the industry hub and largest market. The state rules resulted in a drop off in loan collections and a drying up of funding for microlenders.

The Reserve Bank of India (RBI) subsequently implemented an interest rate cap of 26 per cent for most microfinance loans, which sometimes ranged as high as 60 per cent.

Fitch Ratings said in May that 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.

Shares in SKS, which made a popular initial public offering last year, tumbled in the wake of the Andhra Pradesh rules and trade about 72 per cent below their September peak, even after Thursday's rally.

"What has happened has happened and I don't think you can reverse that," said an analyst with a local brokerage, which has a 'reduce' rating on the stock, but did not wish to be named as he was not allowed to speak to media.

Ambit's Agarwal said risks still remained.

"For the investors, I would believe the things would not change much in terms of profitability. It is difficult to recover the money in Andhra Pradesh due to the political situation there," he said.

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