SKS moves SC against Andhra’s ‘obstructing’ microfinance Act

With its balance sheet going off track primarily due to the issues in managing its portfolio in Andhra Pradesh, microfinance major SKS Microfinance has sought the intervention of the Supreme Court for bringing back normalcy in the AP market. The company has filed a special leave petition in the apex court seeking a stay on the Act promulgated by the state government to rein in the microfinance institutions (MFIs) that are seen using coercive recovery practices.

However, while refusing to stay the implementation of the Act, a Supreme Court bench of Justices Markandey Katju and Gyan Sudha Mishra has issued notice to the AP government directing it to file a reply and posted the case for further hearing to the third week of July.

The company has taken serious objection to some sections of the Act that it saw as major hurdles in business expansion. Section 10 of the AP Microfinance Act mandates prior approval of every loan application by the state government authorities. The Act also says that the regular meetings of the borrower groups be held at the village panchayat offices.

The company has pointed out to the court that the Act was not allowing the company in conducting its business properly. Senior advocate Fali S Nariman appearing for SKS Microfinance submitted that the state government has no power to regulate the sector.

The AP government had passed the Act in the wake of a spate of suicides by the microfinance borrowers allegedly due to the coercive recovery practices by the MFI agents. Though most of the MFIs that operate in the state are registered with the RBI as NBFCs, the state government insisted that the issue was well within its jurisdiction since the state can regulate money lending activities.

SKS for the quarter ended March 2011 had a net loss of about Rs70 crore primarily due to the provisions made towards bad debts in AP.