SKS to seek legal view on Andhra ordinance

SKS Microfinance is seeking legal clarification on whether the restrictions imposed by the Andhra Pradesh government apply to it.

According to a filing, dated October 17, to the Bombay Stock Exchange (BSE), the country’s largest microfinance institution (MFI) wants to know whether the ordinance issued by the Andhra Pradesh government will apply to non-banking finance company (NBFC) MFIs, as SKS is not an NBFC as defined under Section 58A of the Reserve Bank of India (RBI) Act, 1934, as outlined in the ordinance.

SKS said it had learnt from the microfinance industry association, the Microfinance Institutions Network, that the latter was planning to move a stay petition against the ordinance.

The Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance, 2010, issued last week, aims to force MFIs to disclose the methods they use to recover money and justify the higher interest rates they charge. The ordinance, which came into effect from October 15, also proposes to set up fast-track courts to deal with MFI-related issues.

“The ordinance does not have an interest rate ceiling on MFI loans except a mention that ‘no MFI shall recover from the borrower towards interest .... an amount in excess of the principal amount’. This works out to a flat interest rate of 100 per cent, compared to our flat rate of 12.5 per cent, with one per cent upfront interest (26.7 per cent effective on a declining balance). So, the provision is unlikely to have any adverse impact on our interest rate structure,” SKS said.

According to SKS, provisions related to harsh recovery practices are likely to affect only MFIs which incentivise field officers for collection, penalise field officers for shortfall in collections, pay commissions to centre or group leaders for collections and deploy commission/collection and recovery agents.

Since its inception 13 years ago (eight years as a non-government organisation and five years as an NBFC), SKS never had any of these policies, it said. SKS is fully equipped to meet the various data requirements called for by the ordinance, as it holds all its data on members (7.3 million as of June 30, 2010) in a digitised form, it claims.