Microfinance Horizon

By K V Ramana

6 November 2010 [Daily News & Analysis]

The Andhra Pradesh government has decided to go ahead with the introduction of a Bill to regulate microfinance institutions (MFIs) in the state despite all resistance. The legislation will focus on curbing extortion from the borrowers under the guise of interest and the coercive recovery practices of the MFIs.

Official sources said the ordinance on MFIs, promulgated on October 15, would be introduced as a Bill in the state assembly, which is to reconvene later this month.

“The government is clear on what it has done and what should be done in handling the MFIs. Though they are all registered with the RBI as non-banking finance companies, they are engaged in money lending and they come under the state government’s jurisdiction,” an official source said.

Though there were objections from the industry to a specific Act for regulating the sector, the state government has decided to go ahead with the Bill and iron out the issues, which are said to be creating major road blocks for the MFIs in carrying out business.

“The government is not against the MFI activity. But, there is a need to regulate the activity and ensure there is no unnecessary pressure on the borrowers,” the source said.

Though the Bill is still being given the final touches, sources said the key elements of the ordinance will definitely be carried forward in the Bill. Registration will be mandatory for the MFIs keen to operate in the state will be mandatory and any MFI operating without such registration will face punitive action including punishment up to three years and Rs1 lakh fine.

There is also a proposal for naming all the directors and the top management in case of violation of this rule, though the government is said to be seeking legal opinion on such a move.

With the preliminary information on the MFI activity in the state suggesting the borrowers are being pushed into a debt trap due to multiple lending by the companies, the government has decided to cap such lending.

The MFIs will be asked to apply to the registering authority before lending to a borrower or a self help group already covered by a bank. The authorities will then verify the repaying capacity of the borrowers. Only after ascertaining the repayment capacity will the MFIs be allowed to extend loans. Lending to SHGs with a bank linkage without seeking the prior approval of the authorities is also a punishable offence.

While coercion will be a crime of sorts, leading to a punishment of up to three years, the MFIs will also have to disclose the interest collected to the authorities on a monthly basis. The government will also set up fast track courts to try the violations of the MFIs.

“The information available with the authorities so far indicates that the interest rates are higher than what is being claimed by the MFIs. The average rate is upwards of 30%. There is also proposal to make the MFIs start collecting the repayments on a monthly basis instead of weekly. There is no final decision on this yet,” the source said.

Industry officials fear the conditions being laid out by the government would have a significant negative impact on the MFI activity in the state initially, though the institutions will have to find ways to keep themselves afloat.