Andhra Pradesh passes microfinance Act

Published: Saturday 15 January 2011

On December 15, the Andhra Pradesh legislative assembly cleared a bill to regulate microfinance institutions (MFIs) in the state. The bill replaces an ordinance issued in October following 54 suicide deaths allegedly due to coercive methods of loan recovery by MFIs (see ‘Death by Default’, Down To Earth, November 30, 2010).

The bill mandates MFIs to be registered with the district authority to collect installments at the panchayat office and restricts fresh lending without prior approval of the authority. The bill does not cap the interest rate charged by MFIs as demanded by civil society groups and politicians. MFI representatives had lobbied against any attempt to put a ceiling on the interest rate. “This is a respite for MFIs,” said Vijay Mahajan, president of Microfinance Institutions Network, a self-appointed regulatory body.

The respite might be short-lived. A few days before the bill was passed, the state government recommended the Reserve Bank of India’s (RBI) Y H Malegam Committee—set up to look into regulations for MFIs—to cap the interest rate. In its report, the government suggested 8 per cent interest rate for all MFIs while giving the state government power to supervise its implementation. This is about onethird of the current interest rate charged by MFIs.

It also asked the RBI to debar MFIs from accessing capital market. This would block two major MFIs that have proposed entry into capital market with an objective of mobilising `2,000 crore in six months. MFIs allege the state government is pushing the regulations to gain a foothold in microfinace business.

Since the state lends microfinance through self-help groups, the bill aims to keep the groups out of MFI’s influence. Meanwhile, MFIs’ collection of installments has reduced to 20 per cent from 95 per cent in April- August. In Andhra Pradesh MFIs claim they are channelising collections from Chhattisgarh and West Bengal to repay their loans from banks.

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