High court asks state to explain terms in ordinance.
The activities of microfinance institutions (MFIs) in Andhra Pradesh have come to a grinding halt, following an ordinance issued by the state government last week regulating their operations.
The Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Ordinance, 2010, which came into effect on October 15, stipulates that MFIs should register with the project director of the district rural development agency.
With none of the MFIs complying with the provisions of the ordinance so far, Krishna district collector Piyush Kumar on Wednesday directed the MFIs to stop their activities, particularly recovery of loans, till they registered themselves.
Andhra Pradesh’s share, which is about 33 per cent of the total MFI funding of Rs 30,000 crore in the country, is now likely to be hit.
Kumar warned the MFIs of strict action if they were found carrying out their activities without being registered. According to the district administration, the MFIs had advanced over Rs 290 crore to as many as 200,000 people in the district.
Krishna was one of the first districts to report alleged harassment by MFIs in the last decade. The district administration ordered closure of MFIs and sent a report to the state government, following which an inquiry was conducted in 2006. The State Human Rights Commission, too, condemned the attitude of MFI recovery agents in collecting the weekly instalments from women members.
Not just Krishna district. According to the Micro Finance Institutions Network (MFIN), recoveries have been stopped across the state ever since the ordinance came into effect. MFIN, an association of MFIs, pegged the non-recovery by its members at Rs 250 crore.
The impact of non-recoveries, however, seemed to be more on SKS Microfinance, which claimed it could not collect Rs 1,400 crore in the past week.
According to MFIN, the total loan outstanding of all MFIs in the state was Rs 9,000 crore.
MFIN, which filed a petition before the AP High Court against the ordinance, argued in the court that the state government had not specified the rules, nor did it make the required forms available for the MFIs to comply with the ordinance.
A two-member bench of the high court, while hearing the petition filed by MFIN today, asked the government to explain the rationale behind stopping lending and recovery of loans and posted the matter for Friday.
The bench, in view of the MFIs being not allowed to carry out their activities till they got registered, asked the government to reply on what would happen to the principal amount already lent and the interest on it. “How to protect the interests of the MFIs? They have to recover the loans to repay to the institutions that they have borrowed from,” the bench said.
In all, there were three petitions — one filed by SKS Microfinance, one by MFIN and one by a borrower.
Arguing for MFIN, a senior counsel said the Reserve Bank of India, which was the regulator for non-banking financial companies (NBFCs), interacted with various stakeholders and gave them time to react before bringing in a regulation. However, the AP government failed to take the stakeholders into confidence before issuing the ordinance.
He contended that there should be some protection for the MFIs and should not be forced to close down their business in the name of regulation. The MFI agents should be visible in the villages or else the borrowers would read this as a signal to stop paying the loan instalments. He said the ordinance, not allowing MFIs to function till they got registered, would affect the lending and recovery in the microfinance sector.
Another counsel said the ordinance did not define what a low income group meant for the MFIs to lend. He also questioned the competence of the district rural development agency to be the registrar of MFIs. The ordinance did not say which MFIs were eligible and which were not, for lending. The new order did not say how an MFI should prove its worth, whether in terms of the risks it took, clients it served, credentials, lending and other parameters, he contended.
The insistence of recovery at gram panchayat offices would work only against the interest of the borrowers as they would have to travel long distances to repay, as against the door-step collection by the recovery agents, the counsel said.
The Advocate General, who represented the government, sought time till Friday. He said the MFIs in the state indulged in coercive methods of recovery. So far, 57 people have committed suicide in the state allegedly due to harassment by MFI recovery agents. He said the companies did not follow the Grameen Bank model established by Muhammad Yunus, which won him the Nobel Prize for 2006.
