Mumbai: The battle over the regulation of India’s Rs. 20,000 crore microfinance industry is far from over, with Andhra Pradesh, the largest market for Indian microlenders, remaining firm on retaining its own law on the issue despite a proposed national legislation.
Microfinance institutions (MFIs) extend small loans to the rural poor at higher rates than banks after sourcing money from banks.
The proposal for a national MFI law “doesn’t change the fact that MFIs come under the purview of moneylending activity, and hence, the state law,” Reddy Subramaniam, principal secretary, rural development, Andhra Pradesh government, said on Friday in a telephone interview. “There are a number of judgements from high courts that prove this fact.”
He also said the draft regulation has been formed without consulting the southern state.
On 6 July, the Union government released a draft regulation to govern the sector, making the Reserve Bank of India (RBI) the sole regulator of the microfinance industry. The Microfinance Institutions (Development and Regulation) Bill is expected to supersede all state laws, including the Andhra Pradesh law that has thrown the industry into a crisis.
After a spate of suicides by poor borrowers allegedly driven by coercive loan recovery practices of microlenders, Andhra Pradesh, which accounts for at least one-fourth of the industry, promulgated a state law in October 2010, banning MFIs from collecting weekly repayments and making government approval mandatory for every second loan to a borrower.
But the draft Bill, which has been posted on the Union finance ministry website for public comment, says MFIs registered with RBI won’t be treated as moneylenders, thereby keeping them out of the purview of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.
“There are constitutional issues needed to be looked into. Parliament cannot normally legislate on a state matter unless it is an exceptional circumstance, which does not arise here,” said Subramaniam.
But a Union finance ministry official, who did not want to be named, said MFIs cannot be categorized as moneylenders as they undertake many other financial activities. The government will take feedback from various stakeholders till end-July and hold another round of discussion with all stakeholders.
“It is possible that we will invite the Andhra Pradesh government for discussions. But we have not decided anything as of now,” said the ministry official.
Andhra Pradesh has given its views on the Bill to the government and is hopeful that necessary changes will be made in the draft, Subramaniam said.
Industry officials said an ongoing litigation between SKS Microfinance Ltd, India’s largest and only listed microlender, and the Andhra Pradesh government on the state legislation, expected to come up for hearing this week, will be crucial in determining the sector’s future.
SKS officials could not be reached for comments.
The impact of the state law is already visible on MFIs’ books.
SKS has seen its loan book contracting to Rs. 4,111 crore in March from around Rs. 5,000 crore in September last year, with its Andhra Pradesh portfolio declining to about 20% of its loan book from 26% late last year.
The loan book of Bhartiya Samruddhi Finance Ltd (BSFL), an MFI promoted by Vijay Mahajan-led Basix Group, shrunk to Rs. 1,117 crore from Rs. 1,808 crore in September, when the crisis hit the industry.
The SKS stock lost at least 60% of value between September 2010 and July 2011, but since the draft Bill has been released, it has risen by 56%. The stock closed 2.1% up at Rs. 534.55 on Monday on the Bombay Stock Exchange while the benchmark Sensex ended at 18,507.04, down 0.30%.
The collection rates of most of Andhra Pradesh-based MFIs, including SKS and BSFL, fell to around 10% after the state government promulgated the law last year.
At least five MFIs—Trident Microfin Pvt. Ltd, Share Microfin Ltd, Asmitha Microfin Ltd, Spandana Sphoorty Financial Ltd and Future Financial Services Ltd—had to opt for a loan recast to tide over the crisis.
The crisis has a cascading effect in other states, and is already affecting the repayment habits of borrowers, officials said.
“Once the Bill is passed, state governments have to follow that whether they like it or not,” said Kishore Kumar Puli, head of lobby group Microfinance Institutions Network’s Andhra Pradesh chapter and chief executive officer of Trident Microfin. “But at the same time, cooperation of Andhra (Pradesh) government is critical as we have to work with them closely.”
Early this year, RBI issued regulations to govern MFIs operating as non-banking financial companies (NBFCs), based on the recommendations of an expert committee, headed by noted chartered accountant Y.H. Malegam.
It capped the interest rate that MFIs can charge at 26% and made a minimum two-year tenure mandatory for all loans above Rs. 15,000.
In an interview with Mint in January, Malegam had said that the panel had held discussions with all stakeholders including Andhra Pradesh government officials to discuss the new rules.
“They said the state government would consider. But obviously, they don’t seem to agree to that. There is nothing we can do in that matter,” Malegam said.
To ensure the participation of stakeholders, the Centre’s draft law has proposed to establish state advisory councils for close coordination between the states and the Centre with regard to the working of the industry.
The fate of the microlending sector is crucial for Indian banks, which have lent at least Rs. 14,000 crore to the sector.
“A Central legislation should give more clarity and uniformity to the whole sector, and for the banks in particular. It is preferred compared to state-level legislation,” said Ramnath Pradeep, chairman and managing director of Corporation Bank, which has an exposure of Rs. 700 crore to MFIs.
Mathew Titus, executive director at Sa-Dhan, an association of microlenders, said any regulatory environment should take into account the fact that banks are sourcing money from the public.
“We have to recognize that the funds, which are flowing from banks are depositors’ money. So any regulatory environment that comes in needs to take into account that fact. A uniform regulation at national level is desirable,” Titus said.
The stand of Andhra Pradesh government assumes significance in the backdrop of the state’s plan to set up its own NBFC with the participation of state-run banks. This NBFC will lend to federation of self-help groups and will have reach to around 10 million borrowers in the state. Industry officials say this will pose a direct threat to the existing companies and can kill the competition in market.
“The state is contracting its own stand on the matter. On one side, it wants to stop commercialization in the industry, but on the other side, it is floating a commercial vehicle in the form of NBFC,” Puli of Trident, said.
According to Subramaniam, the proposed entity will lend at 15% or below to poor borrowers whereas other microlenders lend at a minimum 26%.
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