Pranab asks AP to soften new rules for MFIs

In an indication that the union government does not intend to emulate Andhra Pradesh in regulating the rates charged by microfinance institutions (MFIs), finance minister Pranab Mukherjee said micro lenders must themselves develop a code of conduct on interest rates and prohibit coercive recovery methods. He also said he will ask the Andhra Pradesh government to soften its recent ordinance on MFIs.

''Microfinance institutions should have a code of conduct to ensure interest rates are not high, coercive methods for recovery are not applied,'' Mukherjee said at the annual economic editors' conference in New Delhi.

He said state governments were well within their rights to regulate lending practices, but added that the centre was in talks with the Andhra Pradesh government. ''I have spoken to the Andhra chief minister (K Rosaiah) about making corrections in the ordinance so that the harsh conditions are taken off,'' he said.

The finance minister said MFIs should follow prudent banking practices and lend only to those who have the capacity to pay back the loan, but added that ''I am not thinking of appointing any regulator at this point.'' However, the Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (NABARD) are keeping a watch on the developments, he said.

Earlier this month, the Andhra government issued an ordinance laying down stringent norms for microfinance firms for recovering money after a spate of suicides rocked the state. The industry has deemed the provision harsh and sought relief from courts, complaining that it has become difficult to recover loans after the new ordinance came into effect.

Also, SKS Microfinance has been under the scrutiny of the Securities and Exchange Board of India (SEBI) over the sacking of its popular chief executive officer Suresh Gurumani soon after its IPO raised Rs1,600 crore.