Need for stable regulatory regime to revive MFI sector: Fitch

"Should India implement transparent and uniform regulations, this would add a level of certainty to a previously under regulated sector, thereby reducing risk," Fitch said in a report.

Micro finance -- the business of doling out small loans at high interest rates to poor who are unable to access bank credit -- has come under intense regulatory scrutiny following an ordinance passed by the Andhra Pradesh government.

The ordinance, which has now been enacted, seeks to tighten the screws on the industry, which has been blamed for a spate of suicides in the state.

"Consolidation is likely to be a feature of the sector as MFIs re-examine business model in response to the regulations. Interest rate and margin cap on lending...will have the biggest impact on the smaller players, forcing commercially oriented MFIs to seek greater skill or to withdraw from the market," it added.

However, Fitch said there is a possibility of overlap of regulations at the level of state as well as the Reserve Bank, which could have a risk of "unintended consequences". The RBI constituted the Malegam Committee in October last year to study the state of micro finance institutions (MFIs) in the country. The Committee, among other things, suggested capping interest rate at 24 per cent for MFI loans.

They were allegedly charging interest rates of over 30 per cent, which was along with their reported coercive recovery tactics.

"The experience of cooperative banks in India suggest that multiple regulators may not be as effective as a strong regulator, and may also make it difficult for MFIs to comply with different sets of guidelines," Fitch Senior Director (Financial Institutions) Ananda Bhoumik said.

It said the sector is likely to see constraints in receiving both debt and equity funding as investors reassess the ricks in the sector. There are about 1,700 MFIs in the country, providing loans to over 100 million households.