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Andhra Pradesh High Court refuses to set aside MFI Act

Tuesday, 12 February 2013 - 9:00am IST | Place: Hyderabad | Agency: dna

However, the high court has put in a reminder, saying a central law on micro-lenders is waiting for nod.

The Andhra Pradesh High Court has refused to strike down the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2011 (AP MFI Act), that had nailed the microfinance bodies (MFIs) indulging in coercive recovery practices resulting in a spate of suicides by borrowers in 2010-11. In response to a public outcry on the alleged high-handed approach of some of the MFIs, the state government had promulgated a law to discipline the micro-lenders.

However, while disposing of petitions filed by microlender SKS Microfinance and microfinance lobby group MFIN, the bench comprising Chief Justice Pinaki Chandra Ghose and Justice Vilas V Afzalpurkar has indicated to the state government that it should take cognisance of the fact that a central law on MFIs is awaiting approval in Parliament.

The petitioners had challenged the state Act on the ground that the microfinance as a sector is regulated by the RBI and does not fall in the state list of legislation. The petitioners had sought the court’s intervention to declare the law void.

After hearing out all the parties, including the RBI, the HC has asked the state government to await the central legislation and carry out a review accordingly. However, a detailed order copy from the court was not available till late on Monday to figure out the exact judgment. According to lawyers, since there was no specific pronouncement against the state Act, it construes continuation of the legislation at least till the central law is passed and the state government takes cognisance of the law.

The AP MFI Act was in the news since the state constituted a third of the MFI market in the country valued at about Rs30,000 crore. Close to Rs10,000 crore of various MFIs was stuck in the AP market, with the state Act laying down a particular procedure for recovery and advances. In fact, SKS had to write off about Rs1,400 crore advances in the state with the recoveries taking a back seat in the wake of the Act.

The court has also taken note of the fact that the MFIs are now brought into a new regulatory set-up by categorising them as NBFC MFIs and the same was informed to the court by the RBI through a counter affidavit.
Meanwhile, the state government officials have claimed that the petitions filed by the MFIs were dismissed by the high court and the AP MFI Act continues to remain in force. The MFI representatives, however, are optimistic that the state Act would get overruled once Parliament passes the new Bill, thereby taking the activity out of the state’s purview. “We are optimistic that the central Act will provide a conducive atmosphere for MFIs to operate in all states, including Andhra Pradesh. We understand that the entire MFI activity would now come under the sole jurisdiction of the RBI. However, we are yet to go through the court order in order to interpret it and comment,” an MFI official said.

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