News broke early Friday morning that SKS Microfinance would be shuttering 78 branches and letting go of 1,200 employees in the battered Andhra Pradesh region. After weathering the storm through 2011 and into 2012, SKS believes it is on the upswing and the markets are tending to agree, with SKS’s stock value up by 20% at one point in the last 9 months.

This timely piece of news comes shortly after the government moved one step closer to signing a bill centralizing the authority of microfinance regulation. The passage of the Micro Finance Institutions (Development and Regulation) Bill would have provided SKS the upper hand in situations like the state government crackdown in late 2010.

This leaves SKS in an opportunistic position going forward: Sure you’re down, but you’re not out. Things are looking up, and though they might be rough for a little while longer, you can expect SKS to continue growing again soon. Two key questions present themselves, in my mind:

What is the mindset leading up to expansion?
With SKS huddling close to (their new) home in Mumbai, how do they restructure themselves, turn around a profit, and get in position to grow their business? They’ve already slashed operational costs through layoffs and office closings, but what needs to change from a strategic level? Are they focused on improving the efficiency of current operations?

Lots of questions here, but the point remains: the current model hasn’t worked, and even though there will (hopefully) be some centralization around microfinance authority, the government is still not your friend in business.

What are the lessons learned from expansion?
SKS faced difficulty when dealing with the different states’ restrictions, and appeared to have expanded beyond their reach. While granted their struggles in the past year were by no means unrelated to the governmental actions in AP, but that notwithstanding, it is clear that there needs to be a rethinking of the growth strategy. Can technology help, moving forward? Is slower expansion the expectation?

With horrifying stories of agents tracking down borrowers, there is no doubt that SKS cannot afford another PR misstep if they hope to move past their current state. Their lending and collection practices must change and adapt to each unique locale.

Once the beacon of Microfinance as a budding industry, SKS has since been humbled by the people and the government of India. How will they respond? How will they improve to ensure this doesn’t happen again?

- Chris