Ailing MFIs hail move to bring in central law

The crisis-ridden microfinance sector has welcomed the budgetary proposal to table the new MFI Bill, saying the regulatory clarity will help in the resumption of bank funding.

"Banks had virtually stopped funding following the developments in Andhra Pradesh. But now, as a result of the clarity on the regulatory front, I am sure bank funding will resume," chief financial officer of the country's only listed microlender SKS Microfinance, Dilli Raj, told PTI.

Finance Minister Pranab Mukherjee said in Budget speech that he will be tabling the Micro Finance Institutions (Development and Regulation) Bill in the current session of Parliament.

At present, the microfinance sector is governed by state laws in Andhra as well as the Reserve Bank regulations.

Raj said that coming from the Centre, the Bill will override the AP law, which has hurt the sector badly, and hence bring in regulatory clarity.

"The Bill will also prevent regulatory arbitrage and promote healthy development of this industry," the chief executive of the sectoral umbrella body MFIN, Alok Prasad, said.

Raj said the legislation will also help the sector recover its dues from Andhra Pradesh, its biggest market, and added that SKS alone has been forced to write off loans of over Rs 9,000 crore in the state.

Bucking the general market trend of selling, the SKS scrip rose 1.32% on Friday after the introduction of the Budget, when Sensex tanked 1.2%.

Problems for the sector started in October 2010, following a spate of suicides by borrowers in Andhra due to alleged pressure from recovery agents appointed by MFIs. The AP government then passed a law which gave overarching powers to the state and imposed a slew of measures to control MFIs' activities, including capping their lending rates.

"The Bill is likely to rectify the lack of uniformity in regulation, eliminate state level interventions and enable closer monitoring of this ailing sector," consultancy firm Ernst & Young India partner Viren H Mehta said.