The problems at SKS Microfinance, India’s only listed microfinance institution (MFI), are getting worse by the day. The Andhra Pradesh government had enacted the AP MFI (Regulation of Money Lending) Act late last year. This came after some borrowers were alleged to have committed suicide following strong-arm tactics by various MFIs to recover loans. With the Act in place, borrowers stopped repaying loans, spelling trouble for the entire industry.

Salvage efforts after that have not worked. The Union Budget in February announced a US$20 million equity fund for the microfinance sector. This was read as a sign of government support, but the amount was considered inadequate.

Then, on May 3, the Reserve Bank of India (RBI) stated that it would treat the sector as a separate category and announced various concessions. But the Andhra government said that it would go by its own Act, leaving the MFIs where they were before.

Expectedly, when SKS announced its results on May 6, there was blood on the balance sheet. For the fourth quarter of 2010-11 (January-March), the company reported a net loss of US$15.6 million, in contrast to a profit of US$7.6 million in the corresponding period the previous year. Turnover for the full year increased 32% to US$286 million. Profit after tax was down from US$38.9 million to US$24.8 million. “We took a conscious decision to adopt more stringent provisioning norms,” says chief financial officer S. Dilliraj.

The SKS share has been on the decline since the AP ordinance. Over the past few days, however, it has been really plunging. SKS fell 20% even before the results because of a downgrade by JP Morgan. On May 9, it was down another 18%. On May 10, however, it rose 10%, which analysts have attributed to bottom fishing. Dilliraj had briefed the media earlier in the day that while the company would face “near-term pain for a quarter or two,” its prospects were bright over a longer period. Meanwhile, amid market rumors that the Securities & Exchange Board of India (SEBI) is investigating the share price movements, the company has said it welcomes such a probe.

India Knowledge at Wharton had written about SKS when the company was still flying high. Backed by George Soros and N.R. Narayana Murthy, it promised to be a worthwhile initiative in financial inclusion. But, as the article had pointed out, “When an MFI becomes for-profit, the danger does exist that it might lose its moral and ethical compass.” It would be an exaggeration to say that that has happened to SKS Microfinance. But, for now at least, it does seem to have lost its financial compass.