MFIs caught between RBI and AP Govt norms

Microfinance Institutions (MFIs) in Andhra Pradesh are in a state of confusion as some of the recommendations made by the Reserve Bank of India (RBI) for the sector are contradicting the rules prescribed by the State Government in its Microfinance Act.

Andhra Pradesh accounts for almost 25% of the Rs 30,000-crore microfinance trade in the country. As many as 24 of the total 44 MFIs recognised by the RBI are operating in the State.

The central bank, while accepting the Malegam Committee report, recently suggested that the repayment schedule (weekly or monthly) of loan can be chosen by the borrower.

However, the AP Micro Finance Institutions (Regulation of Money Lending) Act, 2011 clearly says that the repayment cycle should not be less than a month.

The dissimilarity may further affect the already crippling microfinance sector in the State, said Microfinance Institutions Network (MFIN), the representative body of micro lenders.

"There is absolutely no clarity on the issue of repayments schedule. There are two people (AP government and RBI) trying to regulate the system. It can only increase the confusion.

We will approach RBI, Finance Ministry and also the State Government for further clarity on the whole issue," Alok Prasad, Chief Executive Officer of MFIN, told PTI.

The AP Government has no expertise in financial sector regulation. The RBI is the only institution that possesses the expertise and its regulation should be followed, he said.

"There is a duality crisis in Andhra Pradesh. The AP government must step out from trying to regulate financial institutions," Prasad said.

On the other hand, the state government is up in arms against the RBI's recommendations for the lenders.

The government has decided to oppose some of the recommendations announced by the RBI last week as a part of the monetary policy announcement.

Reddy Subrahmanyam, Principal Secretary (Rural Development), said the RBI did not address many critical matters like the issue of old loans extended by the MFIs at rates as high as 60%.

The interest rate being charged by MFIs should have been capped at 24% as recommended by the Malegam Committee, instead of allowing it to be 26%, he said.

"We are going to write a letter expressing our reservations to the RBI and Ministry of Finance," he added.

The Rural Development Department of the state is gearing up take the apex bank head on.

In a recent communication to its officials, the Society for Elimination of Rural Poverty (SERP), a state government body that is empowered to regulate MFIs, said despite the RBI's recommendations, the Microfinance Act will continue to apply to all MFI operations in AP.

"The government has got legislation powers from the Constitution, whereas the RBI's power to issue executive instructions is a statutory power. Therefore, it is not in the domain of the RBI to annul the state legislation," a government circular said.

"More so, the Act regulates the money lending aspects and transactions of the MFIs, which (fall) exclusively within the domain of the state government," it added.