Andhra Pradesh lambasts microfinance bill, wants full rethink

In a 1200-word, aggressive response, the Andhra Pradesh government has called for a rethink on the microfinance bill introduced by the finance ministry, raising point by point objections to its provisions.

The state government is also seeking legal opinion on the way the new bill would interfere with certain constitutional provisions, which had authorised the state to have control on various activities, including money lending.

“The state government started focusing on the activity of microfinance institutions (MFIs) after there was a spate of suicides following coercive recovery practices. The attempt of MFI agents to forcibly recover money from borrowers is an offence and provisions made to deal with that in the law enacted by the state government,” a state official said.

“Even if the Reserve Bank of India (RBI) becomes the sole regulator of the sector, the fallout of coercive recovery practices including suicides becomes a subject of state,” he said.

The state also wants to know why the issue interest rate has been left untouched.

“The bill talks about capping margin, when the problem is with the interest rate. There are MFIs charging about 40% interest but showing just 6% margin. So that is not the best solution,” the official said.

The Andhra government in its official response to the Bill late on Friday — a copy of which is with DNA — said it is fallacious to describe the MFIs as ‘extended arms of the banks’.

“The lending practices, interest rates, recovery practices of the banks and the MFIs are radically different … the mere fact of drawing funds from banking system cannot make them extended arm of banks,” it said.

Such an expression is not only inappropriate but also dangerous, for two reasons, the state pointed out. First is that if the MFIs become the ‘extended arms of banks’, banks will have no reason to push the financial inclusion agenda of the RBI forward. As a result, the unserviced, undeveloped rural areas will be ceded by the banks to these financing companies leaving them at the mercy of the MFIs and their agents.

Secondly, it said, the intention is to equate the MFIs with the banking network, the correct course would be to mandate them to convert into banks and operate under the banking regulation. By giving them a status of a bank by a back door, the draft allows giving them privileges enjoyed by a bank without the concomitant obligations.

The draft labours to state that none of the activities of MFIs shall be categorised as ‘money lending’ (Section 42) and therefore proposes to take them out of the purview of the money lenders’ regulation.

It may be kept in view that the crisis in AP precisely arose out of the questionable lending and recovery practices of MFIs, calling for regulation of their money lending activities and bring greater transparency in the dealings, the government response said.

The statement quoted YV Reddy, former RBI governor, who said, “for-profit MFIs should be treated at par with money lenders and should not be subject to soft regulation as they are a bigger risk to the system than individual lenders who extend loans out of their own net worth”.

A division bench of high court of Kerala, the note said, on November 18, 2009, ruled that the act of any person engaged in the business of advancing
and realising loans or accepting deposits in the course of such business is a money lender.

Despite the expert opinion and judicial pronouncements in the matter, it is surprising why and how the draft proposed to exclude the MFIs’ activities from the purview of the money lending regulations,” the Andhra government questioned.

Considering that MFIs are primarily involved in lending and recovering of money, and respective state government machinery has ground-level information on the lending and recovery practices of the MFIs, the draft should have mandated the MFIs to operate within the ambit of the money lending regulations.

The statea said Part IX of the Indian Constitution lays down the legislative competence of the Union and States.

The List II (item 30) mandates the State legislature to regulate money lending and the money lenders as a part of protecting the public order. The manner of definition of money lending and the scope of regulation of money lending activities therefore falls under the state jurisdiction.

Section 42 of the draft bill proposes that MFIs shall not be treated as money lenders. This impinges on state legislative competence and therefore is ultra vires, Andhra Pradesh said.

The draft works under a presumption that the interests of the MFIs and the poor are perfectly aligned. This runs contrary to the evidence obtaining on ground which proves that the MFI lending has in fact, led to impoverishment of the borrowers. The spate of suicides in AP is only a pointer in this direction, the statement said.

The draft proposes to allow MFIs to collect the thrift of the poor. So far, NBFCs are not allowed to collect deposits as per the RBI guidelines.

It is not clear whether, if so why, a special dispensation is proposed to these finance companies to collect deposits from the people in the name of thrift, the state asked.  Thrift is the money of the members of the self-help groups, used for internal rotation to meet the emergency credit needs. Any allowance to MFIs to collect the thrift raises the vulnerability of the poor by locking up their savings with one particular MFI, thereby taking away his market choices, the state said.

Considering that there is an unequal relationship between the giver of credit and the seeker, this relationship will work to the disadvantage of the poor with no adequate protection for their thrift amounts, the state said.

In view of this, all provisions in the draft which refer to allowing MFIs to collect thrift may be deleted, the state said.