Vinod Khosla, 55, who was among the first round of investors in SKS Microfinance and now holds nearly 6 per cent in it, backs regulation in the micro-finance sector. “Regulation should be enacted to enforce good practices,” he told Financial Chronicle.

The micro-finance industry plays an important role in extending formal financial services to 28 million of India’s under-served rural poor but has earned severe flak in some states for the usury rates they charge.

“I am not close enough to the situation to comment..,” he said on the on-going controversy about the high rates the industry charges and its use of strong-arm tactics to recover loans.

“But I do believe that micro-finance is the best way to provide credit to the poor,” said Khosla. “It (regulation for micro-finance) is no different from needing good regulation for stock investing or starting a manufacturing facility or anything else,” he said.

Khosla co-founded Sun Microsystems (later acquired by Oracle) and was a general partner of the Kleiner, Perkins, Caufield & Byers — one of the world’s largest venture capital firms.

Khosla, who has mostly concentrated on clean-tech and IT firms, surprised everybody when he first invested in the Hyderabad-based SKS Microfinance in 2006 and twice again in 2007.

At Monday’s closing price, Khosla holding of over 4.2 million shares of India’s only listed micro-finance company is worth Rs 300 crore.

The estimated Rs 30,000 crore micro-finance industry has come under the scanner after borrowers in Andhra Pradesh in particular complained of harsh collection practices and exorbitant interest rates. The Andhra Pradesh government stepped in, triggering fears in the industry of permanent damage to its business models by impairing their growth, asset quality, profitability and capital-raising ability.

The Andhra ordinance seeks, among other things, to prevent coercive methods of recovery, prohibits multiple loans to borrowers and opposes weekly collection of repayments etc. A panel, appointed by the Reserve Bank of India, is also preparing its report on the state of affairs in the industry.

SKS shares have fallen by over 50 per cent from its peaks reached in September. The ‘unregulated’ nature of the industry is blamed by some for the ‘malpractices’.

India is not the only country where the industry is under scrutiny. In November Bangladesh also declared it would cap the annual interest rate at 27 per cent.

Various Indian micro-finance bodies like Sa-Dhan and MFIN have shown willingness to cut rates. But their dependence on bank funds as well as rules prohibiting them from taking deposits mean that they can hardly match rates offered by banks.

Independent analysts feel that RBI and the government will step in to bolster the industry. Abhishek Murarka, analyst at ICICI Securities, admits that regulatory and political risks hang over the sector. “Given its potential and the growing importance of financial inclusion, we expect RBI and the government to step in and formulate laws to bolster the sector.”

In the meantime, however, transition from the current form of delivering micro-finance to a highly evolved stage could see some disruptions.

Crisil, the rating agency, on Monday placed debt instruments of 12 micro-finance bodies on a ‘Rating watch with negative Implications’. This stems from what it calls highly unfavourbale the Andhra ordinance to the industry, resulting in a precipitous drop in the collection efficiency and profitability, especially for those operating in that state