The Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Ordinance 2010 does not seek to deal with, even remotely, the aspects of incorporation, regulation and winding up of trading corporations nor is it connected with banking, according to the state government.
In a counter filed in the High Court on Thursday in reply to a petition by a borrower from Medak district, Padma, the state said the ordinance was aimed at ensuring that the poor were not forced into contracts with prohibitive rates of interest and coerced into repayment of the same. It was also aimed at ensuring that there was no loss of human life due to the operations of MFIs.
The borrowers have challenged the provisions of the ordinance, which does not allow women to be members of more than one self-help group.
Giving the circumstances for the government to enact the ordinance, it said the motto of MFIs had changed from not-for-profit to for-profit. Some of them have even gone for a public issue and invited funds from foreign agencies. Due to this transformation, the approach of MFIs has changed towards the poor, now looked upon as an ‘opportunity for business’ which promised high profits.
The MFIs started using the self-help groups (SHGs) already formed by the government for furthering their business as formation of groups is a time-consuming task and linked to internal dynamics.
The MFIs charged 36 to 54 per cent interest, roughly equalling the rate charged by traditional money lenders. The high interest rates were concealed in weekly installments.
Though the principal amount came down, MFIs continued to charge the interest as though no amount was repaid. Money lenders are regulated by an Act whereas MFIs claimed immunity from any such regulation.
The counter further said multiple lending opened up new business opportunity for the MFIs, who enticed the poor with an easy loan.
Some recovery agents resorted to driving them to suicides to claim the insurance amount, abusing, insulting, molesting, kidnapping of children, making the defaulters stand in sun for 6 to 8 hours, taking away cooking utensils, TV and other items in the house. In the last two months itself, more than 75 cases of suicides due to harassment of the recovery agents have been registered.
The AP government had a series of consultations with the Reserve Bank of India, Ministry of Finance and even major MFIs before issuing the ordinance. The RBI advised that as far as regulating coercive practices, the state government would be the most effective agency. The self-regulatory regime promised by the MFIs did not get operationalised and at any rate the self-regulation has not worked. Also, the regulation relied on more disclosures by MFIs, preventing multiple lending and banning coercive practices in recovery. The MFIs have to register giving areas of operation, rate of interest, due diligence and recovery process.