Suggests state government should review the law enacted in the wake of suicides by rural borrowers
The Andhra Pradesh High Court on Monday dismissed all petitions filed against a special legislation formulated by the state government to regulate micro-finance institutions (MFIs). A division bench of the court, while pronouncing the final judgement, refused to intervene in the state government’s authority in enacting the law. However, the court suggested that the state government should review the relevance of the state law in the wake of a Central Bill, which is awaiting Parliament’s approval.
The petitions challenging the legal validity of the Andhra Pradesh Micro Finance Institutions (Regulation of Money lending) Act, 2010, were filed by a bunch of MFIs, including S K S Microfinance, the only listed MFI in the country. They contended that the micro-finance sector falls under the Central list so the state government could not pass an Act. The petitioners argued that they were not moneylenders. On the other side, the state government argued that while banking was a Central subject, money-lending was a state subject, and given the manner in which many of the MFIs operated, they were engaged in nothing but organised money-lending. MFIs strongly opposed this argument.
Coercive loan recovery
In fact, the state government was forced to enact the stringent legislation after the public outrage over a series of suicides by the poor rural borrowers allegedly due to high interest rates and strong-arm recovery methods of the MFIs. According to the state government’s records, there were 76 suicides related to loan recovery in the state in 2010. As per the First Information Reports of the police, coercive loan recovery by the MFIs was the main reason for these suicides. Criminal cases were registered against many of the MFIs.
The state government promulgated a stringent ordinance on October 15, 2010. The ordinance made it mandatory for all MFIs to register with the state government and announce their interest rates and prohibited multiple lending as well as coercive loan recovery methods. After the ordinance, MFIs claimed that repayment has reduced considerably and they are facing huge resource crunch. The ordinance became a full-fledged legislation on December 15, 2010. The operations of MFIs came to a virtual halt in the state.
The public outrage against MFIs and the virtual halt of MFI operations in Andhra Pradesh resulted in the Reserve Bank of India appointing a board sub-committee on October 28, 2010 to look into the crisis. The committee was chaired by Y S Malegam, a senior member on the central board of directors of RBI. The committee submitted its report on January 20, 2011, and was accepted by the RBI. The Andhra Pradesh government raised strong objections to the recommendations of the committee, saying they favoured MFIs. The Microfinance Bill formulated by the finance ministry based on the Malegam Committee Report for making a framework for regulating the microfinance sector is awaiting Parliament’s approval.
The court has asked the state government to consider the feasibility of continuing with its legislation once the Centre's draft legislation gets Parliament’s approval.
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