Issue of capping interest rates left untouched by cabinet meeting.
The Andhra Pradesh Cabinet on Thursday unanimously approved an ordinance to regulate microfinance institutions (MFIs) operating in the state. The guidelines would be framed once Governor ESL Narasimhan gives his nod to the ordinance in two or three days, according to state Rural Development Minister Vatti Vasantha Kumar.
The proposed ordinance is likely to insist on MFIs getting registered with district rural development agencies, apart from imposing a three-year imprisonment and/or Rs 1,00,000 fine on erring MFIs. The state would also set up fast track courts for dealing with microfinance issues.
The ordinance is likely to have detailed guidelines on recovery, curbing multiple lending, due diligence by MFIs before lending, and setting up of a credit bureau, among others.
The government is also in favour of a debt swap to banks under the Total Financial Inclusion Scheme. It will compute the total loan outstanding in a few days for arriving at the total burden on the state due to the debt swap. “There is no clarity as of now on the total outstanding from MFIs in the state,” the minister said. Kumar was addressing reporters after the specially convened Cabinet meeting.
According to MFIs, the total outstanding in the state would be between Rs 9,000 crore and Rs 11,000 crore. However, the debt swap, if allowed, will only be for the existing loans. The minister did not say how much interest MFIs would be allowed to charge on fresh loans.
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The state government would look to enroll borrowers of MFIs, who are given loans at pavala vaddi (loans at 25 paise, or three per cent per annum) as self-help groups (SHGs) under its Indira Kranthi Patham (IKP) scheme. IKP scheme is aimed at helping SHGs.
The state had earlier said it would make efforts to put a ceiling on interest rates charged by MFIs. However, it left the issue untouched at Thursday’s meeting, as MFIs are registered as non-banking financial companies under the Reserve Bank of India guidelines. Chief Minister K Rosaiah reportedly told his cabinet colleagues that the state government had no jurisdiction to cap the interest rates charged by MFIs.
In the last three days, Rosaiah met with banks, collectors, superintendents of police, rural development officials and other stakeholders, after the state saw a spate of suicides due to alleged coercive recovery practice by MFIs.
Spandana Sphoorty Financial Ltd’s Managing Director, Padmaja Reddy, said the MFI industry would be severely hit if the debt swap scheme came into force.
According to her, it implies that MFIs would get back the money they lend and that would be paid back to banks. However, MFIs would not be in a position to extend fresh loans and as a result, the poor would again resort to taking money from private money lenders, she said.
The whole concept of the government protecting borrowers from higher interest rates would be defeated by the debt swap scheme. “MFIs would not want to operate in a state where the government was not encouraging the sector,” she said, adding they would focus on states where norms were conducive for growth of the microfinance sector.