Andhra MFIs get breather

The provisions of the draft Microfinance Institutions (Development and Regulation) Bill, released by the Centre, seeking public comments, seems to have come as a big relief to the beleaguered microfinance institutions (MFIs) in Andhra Pradesh (AP).

“It is hugely positive for the MFI sector,” Dilli Raj, chief financial officer of SKS Microfinance, the only listed MFI in the country, told Business Standard.

He said the draft legislation provided for exempting MFIs from the Money Lending Act and various other state-level legislation and “now we are waiting for its enactment”.

The operations of MFIs in AP, which earlier accounted for nearly 40 per cent of the industry’s activity, have been drastically affected since the state enacted the AP Microfinance Institutions (Regulation of Money Lending) Act last year.

Following the new legislation, the total disbursements of MFIs in the state have declined from Rs 5,035 crore in the first half of 2010-11 to just Rs 8.5 crore in the second.

According to Basix Founder and Microfinance Institutions Network (MFIN) President Vijay Mahajan, currently there are 9.2 million borrowers in the state who did not repay MFIs. The default amount is as much as Rs 7,200 crore, crippling the operations of the entire sector.

Against this backdrop, the draft Bill, which proposed to empower the Reserve Bank of India to regulate the activities of all MFIs, was generally welcomed by the industry.

"We welcome it on behalf of the whole sector," Mahajan said adding the best part of the draft Bill was that it clarified the regulatory road map for the future and had a new generation architecture both at the state and national level.

He said that the draft provided for three layers of consumer protection and safeguarded the interests of both lenders and borrowers. “I think it is a good, progressive and forward looking document,” chief executive officer of MFIN, Alok Prasad, said.

Prasad was a member of the Bill's drafting committee.

Sa-Dhan, an association of 251 community development finance institutions that had been part of the drafting committee, said the Bill would reinforce the sense of legitimacy of microfinance operations.

"It provides helpful measures for client protection and a direction to the microfinance industry to perform its roles with efficiency and effectiveness," Sa-Dhan executive director, Mathew Titus, stated.