A similar law passed by the Andhra Pradesh government in October, 2010, which banned weekly collection of dues, severely affected microlenders, eroding their profitability and threatening their existence.
The high court, however, said the state government should step in to protect the interest of self-help groups if it found microfinance institutions (MFIs) were resorting to “unfair and unhealthy” practices. It added there was a need to empower self-help groups.
“We also hope steps taken by the Reserve Bank of India (RBI) in introducing the Micro Financial Institutions Bill becomes an Act to provide the necessary safeguard to affected parties and provide a successful check on the unhealthy practices of MFIs,” judge Chitra Venkataraman stated in the order, a copy of which is with Business Standard.
MFIs said the judgment was positive for the sector, as curbing microfinance activities by private firms would not only hurt the recovery of the sector, but also impact the rural poor who do not have access to formal banking channels.