AP High Court ruling has sent MFIs back to square one

Any tourist visiting the Charminar, the historic symbol of Hyderabad, is bound to drive past an impressive red and white stone building near the monument. Built in the Saracenic style by Mir Osman Ali Khan, the seventh Nizam of Hyderabad, the tall and impressive stone building, which was completed in 1920, is today the Andhra Pradesh High Court. For the Indian microfinance sector, the building is significant in another way. On February 11, it ended the two-year wait on their petitions questioning a state government's authority to regulate entities such as NBFC MFIs (non banking finance company microfinance institutions), which fall was under the purview of a central authority.

The court chose not to delve into the subject and disposed of the writ petitions.
 
On the morning of judgment day, as was to be expected, the air of anticipation in the packed courtroom was palpable. Representatives from microfinance institutions and the government waited in silence for the division bench of the Andhra Pradesh High Court, comprising Chief Justice Pinaki Chandra Ghose and Justice Vilas V. Afzalpurkar to deliver the judgment.

The key paragraph said: "The directions issued by the Reserve Bank of India coupled with the provisions of Chapter IIIB of the RBI Act will protect the interests of the self help groups from usurious interest rates and coercive means of recovery.... Apart from this, the Micro Finance Institutions (Development and Regulation) Bill, 2012, introduced by the Central Government in the Lok Sabha is a complete code in itself as regards the micro finance institutions. Once that Bill takes the shape of an enactment, we are of the opinion that it will govern every aspect of the micro finance institutions at all levels and in all respects and all the issues raised by the petitioners herein. In such circumstances, it would be a futile exercise for this Court to examine the legislative competence or otherwise of the State to legislate the impugned enactment, therefore, we have not gone into the same."
 
It further suggested that: "The Government of Andhra Pradesh may, therefore, examine the matter ...in the wake of introduction of Micro Finance Institutions (Development and Regulation) Bill, 2012 in the Lok Sabha by the Union of India, which is more comprehensive than the impugned Act..." Finally, it said: "The writ petitions are disposed of accordingly."
 
The response to the judgment varies depending on whom one talks to. Those in government welcome the point that the state law has been upheld. Those from the MFI stable feel, though the case has been closed, that the court has upheld their core argument that the central regulator is the competent authority in this matter.

It is not without reason therefore that RBI deputy governor K.C. Chakrabarty says: "While the state is constitutionally well within its rights to enact a law like this, my own assessment is that since there are regulations now, the state will, at some point, re-examine its own position." The goal of any regulation, he points out, has to be "to facilitate good business and curb bad business but not stop business activity".
 
S. Viswanatha Prasad, co-founder of Bellwether Microfinance Fund, the country's first MFI investment fund, believes that status quo is likely to continue in Andhra Pradesh as far as microfinance activity is concerned. "The confusion that prevailed in terms of the role of the state in regulating centrally regulated entities such as NBFC MFIs (non-banking finance company-MFIs) continues as it was the precise point on which the MFIs were seeking clarity. But the court has chosen not to delve into this," he points out.

MFIs have stopped lending operations in Andhra Pradesh since October 2010, when the state government brought out an ordinance to regulate them following reports of alleged use of coercive loan recovery practices by some lenders.
 
Today, MFIs in Andhra Pradesh have loans to the tune of Rs 6,500 crore stuck as bad debts with borrowers. The lenders were hoping to recommence microfinancing operations and get borrowers to clear previous debt. Perhaps that will still need to wait.