An Andhra Pradesh Law, said to be the root cause of the collapse of microfinance in India and the state in particular, has no jurisdiction over microfinance institutions registered as Non-Banking Financial Company (NBFC), the RBI has told the AP High Court recently.
RBI said the Andhra Pradesh Micro-Finance Institution (Regulation of Moneylending) Act 2010 has jurisdiction only on MFIs which are not NBFCs and not registered with it.
AP Microfinance Ordinance was implemented on October 15, 2010 and subsequently made into an Act in the wake of a spate of suicides by the borrowers allegedly due to the coercive recovery practices by the MFI agents.
AP accounted for nearly 30 per cent of the total Microfinance business which was pegged at Rs 30,000 crore in the country in 2010.
"NBFCs being regulated simultaneously by RBI and State Government will result in dual regulation thereby adversely affecting the functioning of the NBFC-MFIs and the interest of the public," RBI said in an affidavit filed in the court.
This was in response to a writ petition filed by some MFIs questioning the legal validity of AP MFI Act.
"In case of NBFCs the RBI has exclusive power to regulate and supervise them. The provisions of the impugned Act are ultra virus the constitution of India so far as it deals with NBFCs," it added.
The MFI Act mandates prior approval of the state government authorities for every loan application of borrower.
The Act also changed the MFIs collection cycle from weekly to monthly at a designated place.
Fresh disbursals in the State have come to a standstill with the stringent norms set by the State Government.
The State Government has the power to cancel the license of the MFI in case of any violation of the rules of the Act.
"Since the MFIs which are not registered under the impugned Act (AP MFI Act), cannot recover the loans granted by them, it would adversely affect the financial conditions of RBI regulated NBFC MFIs", the affidavit said.