A day after the state government promulgated the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Ordinance, 2010, Chief Minister K Rosaiah has written to Finance Minister, Pranab Mukherjee and Reserve Bank of India Governor D Subbarao, seeking clarity regarding the appropriate agency for regulation of interest rates being charged by microfinance institutions (MFIs).
The copies of the letters were released to the media.
In his letter to the finance minister, Rosaiah said MFIs in the state had caused much distress to the poor. Although MFIs have come into existence as a financial intermediary for the poor, they have actually led to further impoverishment by adopting unethical practices, resorting to multiple lending without due diligence, usurious interest rates and coercive methods of recovery.
“Since all MFIs are effectively engaged in money-lending activity and regulation of money lending falls in the State List, we were advised that the state government can regulate the money-lending aspect of MFI functioning. After due discussion with RBI, to overcome this distress, and to protect the poor from further atrocities, the state government has promulgated an Ordinance for regulation of MFI activities,” the chief minister said in his letter.
According to Rosaiah, the RBI governor suggested the state governments were the best agencies to regulate the coercive interest rates while the banking department secretary had advised the state against regulating the interest rate being charged by MFIs. “There seems to be an urgent need to regulate the effective interest rates being charged,” the chief minister said, pointing out that many MFIs charged interest rates ranging from 36 per cent to 54 per cent.
In the letter to Subbarao, Rosaiah said the state had seen an unprecedented situation caused by a series of suicides by the poor unable to bear the coercion unleashed by MFI recovery agents.
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Later, Rosaiah also spoke to Subbarao in connection with MFIs’ activities. He stressed the need for RBI’s early initiatives on MFIs. The chief minister also thanked RBI for constituting a sub-committee to look into the functioning of MFIs.
The RBI governor informed that the members of the sub-committee would call on the chief minister shortly. Subbarao had also assured that RBI would fully support the efforts of the Andhra Pradesh government to stop the malpractices of MFIs and help the poorer sections.
The new ordinance has come into effect on Friday. The government had also said it would set up fasttrack courts in every district in consultation with the Andhra Pradesh High Court to clear MFI-related cases within three months.
According to the ordinance, MFIs must register themselves with district rural development authorities, indicate their areas of operation, employees, number of members and credit status. It also asked MFIs to display the interest rates, among other things.