2010 saw the fortunes of the Rs 25,000 crore microfinance industry oscillate between capital

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market glory and regulatory gloom and the sunrise sector is now looking forward to a New Year devoid of usurious interest rate controversies and credit crunches.

As 2010 winds down, the story of SKS Microfinance's bombastic market debut is getting overshadowed by unanswered questions on corporate governance, as well as regulation of MFIs.

Microfinance -- the business of doling out small loans at high interest rates to poor people unable to access conventional lending mechanisms -- has come under intense regulatory scrutiny in the wake of an ordinance passed by the Andhra Pradesh government that seeks to tighten the screws on the industry, which has been blamed for a spate of suicides in the state.

Pushing the industry into the public limelight, Vikram Akula-founded SKS Microfinance mopped up over Rs 1,650 crore (around USD 350 million) through its initial share sale in July. The public issue, which attracted huge participation from retail investors, also stoked expectations of more industry players tapping the capital market.

The industry witnessed some low moments following the ouster of SKS Microfinance CEO Suresh Gurmani, who was at the helm of the microfinance lender at the time of its dazzling IPO.

His removal sparked off fresh concerns about corporate governance of MFIs, putting the entities in the public spotlight, with criticism of inscrutable business models and high interest rates of over 30 per cent reaching a peak.

Things got worse when a spate of suicides in Andhra Pradesh were blamed on the high interest rates charged by MFIs. Allegations that the use of strong-arm tactics by lenders caused the suicides also dented the MFIs' image.

Andhra Pradesh accounts for nearly half of the microfinance business in the country, with major players like SKS Microfinance, Spandana Sphoorty Financial, Basix and Share Microfin present in the state.

Against this backdrop, the state government had promulgated an ordinance in October that sought to control the interest rates charged by MFIs, as well as check their alleged use of coercive recovery tactics.

Call it a cascading effect, microfinance entities are now finding it hard to get funds from banks, which is usually raised at an interest rate of 12-13 per cent.

Major banks like State Bank of India, ICICI Bank and Axis Bank are estimated to have lent over Rs 15,000 crore to MFIs. ICICI Bank's exposure to microfinance players is about Rs 2,000 crore, while SBI and Sidbi have lent around Rs 1,000 crore and Rs 4,000 crore, respectively.