AP Microfinance Ordinance: Story so far

Microfinance Focus, Oct 19, 2010: The Andhra Pradesh Microfinance Institutions Ordinance 2010 which was issued by the state’s Governor for protecting the Women Self Help Groups form exploitation by the microfinance institutions through usurious interest rates and coercive means of recovery has brought more controversies to the table than it seeks to address.

The ordinance was issued by the Andhra Pradesh government in the wake of a series of suicide cases in the state that were blamed upon the MFIs who are charging high interest rates and using coercive recovery methods. It was reported that the deaths have kicked up a furore with opposition parties and the State Human Rights Commission demanding action from the government.

The high interest rates charged by MFIs in the state however finds no mention in the ordinance as the state government stands perplexed over its powers of regulating the interest rates. In a letter written to the Finance Minister, Mr. Pranab Mukherjee and RBI Governor, Mr. Subbarao by Andhra Pradesh Chief Minister, Mr. Rosaiah, whose copies were made available to the media, the Chief Minister has seeked clarifications about the appropriate agency responsible for regulation of interest rates charged by microfinance institutions to their borrowers.

“While while the RBI had communicated that the state governments were the best agencies to regulate the interest rates of MFIs, officials in the Union finance ministry advised us against any such moves”, Mr. Rosaiah wrote.

Meanwhile, the Reserve Bank of India (RBI) is reported to have formed a sub committee to look into the functioning of microfinance institutions.   

Under the ordinance, all MFIs operating within the states have to apply for registration with the registering authority of the district within 30 days of issue of ordinance thereby giving details like the purpose of operating, the interest rate charged, system of conducting due diligence and effecting recovery and the list of persons authorized for lending or recovery of money. Registering authorities include Project Director District Rural Development Agency for the rural areas and Project Director MEPMA (Mission for Elimination of Poverty in Municipal Areas) for urban areas.

Microfinance institutions are further barred from granting or recovering loans without obtaining registration under this ordinance. The registering authority can anytime cancel the registration of an MFI after assigning sufficient reasons for such cancellation.

The Ordinance prohibits members of SHG from holding memberships of more than one SHG. For those who already have more than one membership, the option of retaining the membership of one SHG and terminating membership in other SHGs is given. The member has to issue a notice about her termination and settle the amount payable to which has lent monies to such MFIs.

With the ordinance in place, no MFI can recover from the borrower an interest which is in excess of the principal amount and all loans for which an MFI has realized from the borrower an amount equal to twice the amount of the principal shall be discharged. The borrowers shall be entitled to obtain refund form the MFI.                                   

The ordinance also made it mandatory for MFIs to make public the rates of interest charged by them. Moreover, MFIs are now barred from extending further loans to an SHG or to its members which already has an outstanding loan from a Bank unless the MFIs obtain prior approvals from the registering authority.

For putting a check on the increasing use of coercive methods by MFIs for recovering repayments, the ordinance says that MFIs shall not deploy any agents for recovery nor shall use any coercive action for recovering money from the borrowers. It empowers the registering authority to suspend or cancel the license of MFIs found engaged in coercive methods.

Further, the registering authority has also been given the power to require production of records, inspection and seizure for examination and legal actions. MFIs are also required to submit monthly statements to the registering authority.  

The ordinance also empowers SHGs and their members to file a complaint regarding violation of the stated provisions by an MFI before the registering authority. The State government will also be establishing fast-track courts for settlings disputes of MFIs and SHGs.        

Minister for Rural Development Vatti Vasant Kumar is also reported to have said that SHGs were expected to get further relief as the soft loans being arranged to them from banks under debt swap scheme, to clear the MFI loans, would be charged only 3 per cent. The government would bear 10% out of the 13% interest charged by the banks on these loans.

In the meantime, SKS Microfinance which is based out of Andhra Pradesh and is also the largest microfinance institution in the country has a sent a letter to the BSE (Bombay Stock Exchange) seeking legal clarification as to whether the ordinance will apply to NBFC (Non-Banking Financial Companies) MFIs as SKS is not an NBFC as defined under the Sec 58 A of the RBI Act 1934 as outlined in the ordinance.

SKS went ahead to say that lack of interest rate ceiling works out to a flat interest rate of 100% compared to its flat rate of 12.5% with 1% upfront interest (26.7 per cent effective on a declining balance). So the provision is unlikely to have an adverse impact on its interest rate structure.

The letter further clarifies that SKS welcomes the provisions of ordinance which prohibit harsh recovery practices and since its inception it has never had any aforementioned policies. SKS is fully equipped to meet the various data requirements called for by the ordinance as it holds all its members’ data in digitized form and also holds Know Your Customer (KYC) data for all its borrowers.

SKS has even offered to reduce its interest rates by two percent point if the RBI or the government asks so. “We are willing to reduce our rate of interest if the RBI or Finance Ministry asks us to do so. We reduced rate of interest in the past, voluntarily. We are ready to lend at 24 per cent,” SKS Microfinance Founder and Executive Chairman Vikram Akula said in an interview.

No sooner than the ordinance was issued, Telugu Desam and other opposition parties in Andhra Pradesh termed it as ‘inadequate’ and decided to seek Prime Minister Manmohan Singh’s intervention on the issue.  ”The Ordinance is not going to help the poor borrowers. The government says it cannot decide the rate of interest to be charged by the MFIs. But it says the interest cannot be higher than principal. How can it be,” TDP Chief N Chandrababu Naidu told reporters according to Press Trust of India. “Rate of interest is decided for car loans and home loans. But it is not so for the poor people,” he said. He was speaking after a meeting of Opposition parties organised by TDP to discuss the issue of MFIs and also the problems of farmers.

Repudiating these remarks, Mr. AR Reddy, the Minister for Municipal Administration blamed the Telugu Desam for the mushrooming of MFIs in the state during the time when it was in power. Mr. Reddy is reported to have said that the criticism of opposition parties against the ordinance is unfounded.

This is not the first that the government is intervening into the functioning of MFIs and prior to this ordinance successive governments have tried to control the MFIs in the state. Earlier this year, Andhra had sought to bring non banking finance companies under its purview but the bill did not become a law. In the early years of the past decade, Tamil Nadu sought to cap the interest rates of lending companies but the measure was quickly stayed by the courts.

Industry Associations like MFIN and Sa-Dhan are also gearing up to respond to the issued ordinance. The Microfinance Institution Network (MFIN) has today filed a petition in the Andhra Pradesh High Court against the ordinance and it will come up for hearing tomorrow morning. Industry body Sa-Dhan has also called for a meeting on Thursday of all its members to discuss the potential consequences of the ordinance.

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