AP High Court dismisses petitions challenging state's microfinance law

The Andhra Pradesh High Court on Monday dismissed writ petitions challenging the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010. It also expressed the view that the state government should review the legislation. The court suggested a review in the light of the fact that a more comprehensive Microfinance Bill is before Parliament (Lok Sabha) for consideration.
 
However, the petitioners - from the microfinance industry - seem to have been left unsatisfied by the judgment. They were seeking to challenge measures taken by the Andhra Pradesh government in October 2010 to regulate microfinance institutions.

The judgment was delivered by a division bench of the Andhra Pradesh high court, comprising Chief Justice Pinaki Chandra Ghose and Justice Vilas V. Afzalpurkar. It made references to the Reserve Bank of India (RBI)'s guidelines for NBFC MFIs (non banking finance companies - Microfinance Institutions).

With hardly any space to stand in the courtroom, those assembled had a hard time following the proceedings.
 
Many industry representatives were left uncertain about the finer details of the judgment and its implications and got busy outside later trying to compare notes on what the judgment meant.

In October 2010, the Andhra Pradesh government, reacting to reports of coercive loan recoveries by some MFIs, which had allegedly led some debtors to commit suicide, promulgated an ordinance imposing drastic curbs on MFIs. The ordinance, later made into law by an Act of the state Assembly, requires MFIs to register themselves with multiple state government bodies, declare their interest rates up front, make all details related to borrowers public, stop seeking weekly repayments and deny additional credit to borrowers who already have loans pending. The law, in some ways, led to a clampdown on MFIs. Andhra Pradesh accounted for about one-third of the Rs 20,000 crore industry in India. However, the legislation all but killed the industry with MFIs in the state finding loans worth around Rs 6,500 crore stuck with borrowers.
 
MFIs in India are of two kinds: those regulated by the RBI and called NBFC MFIs, and those run by non-profit trusts and societies. NBFC MFIs, which have access to relatively cheap financing from banks under priority sector lending targets, account for over 75 per cent of the loans disbursed by the sector.

Among the MFIs, SKS Microfinance and Spandana and Microfinance Institutions Network (MFIN, an association of 42 NBFC MFIs) have sought to quash the state law. The law was aimed at checking the alleged use of coercive recovery practices by some MFIs. It banned MFIs from doorstep business and made it mandatory for them to get government approval to grant a second loan to the same borrower.
 
However, SKS Microfinance, the only listed MFI in India, gained on the stock exchange on Monday. Its share price rose 10 per cent on the Bombay Stock Exchange to close at Rs 145.75.