The Andhra Pradesh high court on Monday upheld a law that led to the near demise of the microfinance industry towards the end of 2010, but asked the state government to review the legislation in the light of proposed national regulations to govern the sector.
News of the review sent the stock of the only listed microfinance institution (MFI), SKS Microfinance Ltd, surging by its daily limit.
The division bench of the Andhra Pradesh high court, comprising chief justice Pinaki Chandra Ghose and justice Vilas V. Afzalpurkar, dismissed petitions filed by SKS and other MFIs seeking to quash the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2011.
The Andhra Pradesh law, aimed at reining in the alleged harassment of borrowers in the state through coercive loan recovery practices, banned MFIs from approaching the doorstep of their customers, lengthened the loan recollection cycle from one week to one month, and made it mandatory for the lenders to get government approval to give a second loan to the same borrower.
“The court acknowledged the importance of the state law in order to protect the interests of self-help group (SHG) borrowers,” said B. Rajsekhar, chief executive of the Society for Elimination of Rural Poverty, the state-owned agency that oversees women’s SHGs funded by banks in a 20-year-old government programme.
SHGs, which are typically small groups comprising less than 10 women borrowers, make up a large portion of MFI clients.
“The court had made some suggestions, so we are waiting for the order copy,” said Reddy Subrahmanyam, principal secretary, rural development, Andhra Pradesh, and considered the architect of the state law. “We have an open mind to look into the observations raised by the court... The state law is the will of the people.”
The central law will exclude state governments from regulating non-banking financial companies (NBFCs) engaged in microfinance and limit their role to observers, he said.
“We have some views and concerns; we will present it before the (parliamentary) standing committee,” Subrahmanyam said.
The state government’s initiative, introduced first through an ordinance and then as a state law, led to India’s Rs.20,000 crore (by loans) micro-lending industry coming to a grinding halt in Andhra Pradesh, which accounted for at least one-quarter of the industry at the time.
MFIs, which give small loans to poor borrowers at 24-36%, saw collection rates falling to as low as 5-10% in the southern state and fresh funding dried up. About Rs.6,500 crore in microloans is stuck in Andhra Pradesh.
The industry has been seeking to recover from the setback, and banks have only recently started giving MFIs loans again, but just for business outside Andhra Pradesh.
SKS rose 10% to Rs.145.75 on BSE on Monday while the benchmark Sensex lost 0.12% to 19,460.57 points. SKS shares have lost more than 90% of their value from their all-time high of Rs.1,490.70 on 28 September 2010.
While the high court order didn’t strike down the law, it acknowledged the Reserve Bank of India’s (RBI’s) authority to govern NBFCs engaged in microfinance. The central Bill is yet to be cleared by Parliament.
Industry officials are optimistic that the high court’s recognition of RBI as the regulator of NBFC-MFIs will facilitate their operations in the state.
“The judgement is a step towards full recognition being given to RBI’s primacy as the regulator for the NBFC-MFIs. But the Andhra Pradesh law of 2010 regulating MFIs has not been quashed. Apparently, no immediate relief as such has been given to MFIs,” said Alok Prasad, chief executive officer of the Microfinance Institutions Network, an industry lobby.
S. Dilli Raj, chief financial officer of SKS Microfinance, was hopeful operations would return to normal in the southern state once the regulation of NBFC-MFIs by RBI was assured.
“From what we heard orally (from the high court), RBI’s role is recognized as the regulator of NBFC-MFIs. Also, the court has asked the state to review the Act in the backdrop of proposed national MFI Bill and RBI regulations on the sector. These are positive factors,” Raj said.
After a losing streak of seven successive quarters, during which it ran up combined losses of Rs.1,733 crore, SKS returned to the black with Rs.1.2 crore profit in the three months ended 31 December.
The court decision came on the same day that SKS said it raised Rs.390 crore through two securitization transactions, the pooling of loan assets into marketable securities to be sold to banks.
Including the new deals, SKS, which offers small loans to the poor, has raised Rs.803 crore through seven securitization transactions this fiscal year, the firm said in a statement.
The loan pools sold to two banks in the latest deals qualify as priority sector lending under RBI guidelines, SKS said.
Banks need to lend 40% of their loans to agriculture, exports and other weaker sections. Certain securitization transactions too qualify as priority sector lending for banks.
Clarity on regulation of the microfinance sector first emerged in December 2011, when RBI formed a separate category of NBFC-MFIs, based on the recommendations of an expert panel headed by chartered accountant Y.H. Malegam.
RBI stipulated a 26% limit on the interest rate MFIs can charge borrowers. MFIs were also asked to make full provisioning for loan assets due for more than 180 days. In August 2012, the central bank relaxed the provisioning norms and allowed Andhra Pradesh-based MFIs to spread the provisioning burden over five years.
RBI also removed the interest rate cap, but stipulated a margin of 10%. For smaller MFIs, the margin was set at 12%.
The Centre is in the process of putting in place a national law under the Microfinance Institutions (Development and Regulation) Bill, 2012. The Bill is currently under the consideration of the standing committee on finance. The proposed national law is expected to take MFIs outside the purview of state-level legislation, including the controversial Andhra Pradesh law.