AP Refuses to Budge on Microfinance Legislation
Tuesday, July 19, 2011
Mumbai: The battle over the regulation of India’s Rs. 20,000 crore microfinance industry is far from over, with Andhra Pradesh, the largest market for Indian microlenders, remaining firm on retaining its own law on the issue despite a proposed national legislation.
Microfinance institutions (MFIs) extend small loans to the rural poor at higher rates than banks after sourcing money from banks.
The proposal for a national MFI law “doesn’t change the fact that MFIs come under the purview of moneylending activity, and hence, the state law,” Reddy Subramaniam, principal secretary, rural development, Andhra Pradesh government, said on Friday in a telephone interview. “There are a number of judgements from high courts that prove this fact.”
He also said the draft regulation has been formed without consulting the southern state.
On 6 July, the Union government released a draft regulation to govern the sector, making the Reserve Bank of India (RBI) the sole regulator of the microfinance industry. The Microfinance Institutions (Development and Regulation) Bill is expected to supersede all state laws, including the Andhra Pradesh law that has thrown the industry into a crisis.
After a spate of suicides by poor borrowers allegedly driven by coercive loan recovery practices of microlenders, Andhra Pradesh, which accounts for at least one-fourth of the industry, promulgated a state law in October 2010, banning MFIs from collecting weekly repayments and making government approval mandatory for every second loan to a borrower.
But the draft Bill, which has been posted on the Union finance ministry website for public comment, says MFIs registered with RBI won’t be treated as moneylenders, thereby keeping them out of the purview of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.