Hyderabad, India , December, 10 2010 - The Andhra Pradesh government will on Tuesday consider legislation to regulate the microfinance sector by ratifying an earlier ordinance that has curbed operations of the lenders to the poor, state officials told Reuters.

The Andhra Pradesh ordinance took effect in October, while the state assembly was not in session, in response to complaints over high interest rates, aggressive loan recovery practices and overextended borrowers.

The ordinance has severely curtailed the activities of microfinance lenders in the state, which had been their largest single market in India.

Since the passage of the ordinance, skittish banks and investors have pulled back lending to the sector, hampering the operations of microfinance lenders in the country.

The industry, which makes loans averaging about $140, mostly to women, has about $4.6 billion of loans outstanding in India and had been growing quickly until the Andhra Pradesh crackdown in October.

"If the bill is tabled without any amendment it will make it difficult for microfinance institutions to operate in Andhra Pradesh," Vijay Mahajan, president of the Microfinance Institutions Network, or MFIN, an industry association, said in a statement.

Mahajan also called on lawmakers to speak to and seek advice from stakeholders before passing the bill.

Shares in SKS Microfinance(SKSM.BO), the country's only listed microfinance lender, have fallen by more than half since a late September peak. The company had gone public in a popular $358 million initial public offering in August.

The bill, which will be taken up for debate in the state assembly on Tuesday, does not incorporate any changes suggested by microfinance institutions, according to state government officials.

Collection rates in Andhra Pradesh have fallen to 20 percent from 95 percent since the ordinance took effect, Mahajan said.

MFIN counts about 50 for-profit microlenders among its members, which account for more than 85 percent of the microfinance market in India.

Meanwhile, microfinance companies, banks and investors are awaiting the recommendations of a Reserve Bank of India subcommittee, formed in late October in response to the ordinance. The panel is expected to submit its recommendations by mid-January.

The central bank has said it views microfinance as a key part of its drive for financial inclusion, and does not intend to cap interest rates in the industry, which can exceed 30 percent.