The Andhra Pradesh government today came out with an ordinance to clamp down on Microfinance Institutions (MFIs), whose strong arm tactics have led to the death of a number of people in the state recently.
The ordinance called the 'Andhra Pradesh MicroFinance Institutions (regulation of money lending) Ordinance, 2010', went into effect today with the assent of governor E S L Narasimhan.
Around 30 persons have reportedly committed suicide in the state in the last 45 days due to the harassment by MFIs, according to official sources.
The government's move comes within days after two people committed suicide and another attempted to end his life due to harassment by microfinance firms. Two fresh incidents of harassment came to notice on Tuesday (See: Andhra plans legal action to control MFI tactics)
Taking serious note of the matter, chief minister K Rosaiah convened a special meeting of the cabinet yesterday to adopt the ordinance.
The ordinance seeks to regulate the functioning of the MFIs and to help their harassed victims, according to state rural development minister V Vasant Kumar.
Under the ordinance, it is mandatory for all MFIs to register with the district Registering Authority, the project director (PD) of District Rural Development Agency (DRDA) for rural areas and PD of MEMPA for urban areas, within 30 days from today.
The MFIs are required to specify the area of their operations, the rate of interest, the system of operation and recovery, according to the minister.
The Registering Authority may, at any time, either on its own or on receipt of complaints from self-help groups (SHGs) or the general public cancel the registration after assigning sufficient reasons.
According to the ordinance, MFIs cannot seek security from a borrower and are required to prominently display their interest rates in their offices.
''No MFI shall charge any other amount from the borrower except charge prescribed in the rules for submission of an application for grant of a loan,'' the ordinance said.
Also the ordinance stipulates that the amount of interest should not be in excess of the principal amount. Additionally MFIs are barred from extending additional loans until the first loan is cleared, according to the minister.
According to analysts the objective of the ordinance is to clamp down on unregulated lending. The state, meanwhile, has said it would announce a total financial inclusion package enable conversion of higher interest rates on loans to lower rates.
The controversies surrounding the MFIs have not escaped the attention of the Reserve Bank of India (RBI) and the finance ministry. The RBI has moved to form a sub-committe to look into the functioning of microfinance institutions.
According to the D Gopalan, secretary of the Department of Financial Services in the ministry of finance, the government was in the process of laying down regulations for microfinance institutions.
He said there was a regulation for financial institutions in the offing and consultations with the stakeholders were on. He added that it would need to be taken forward to the cabinet and to the parliament.
According to finance minister Pranab Mukherje he has instructed MFIs to bring their cost down and lend at affordable rates. He added he could not pass a value judgement on the rates but he had made strong appeal to MFIs to lower their rates.
Meanwhile, shares of SKS Microfinance , the only listed microfinance entity in the country, today plunged by about 9 per cent on fears that microfinance sector may come under tight government regulations.
Only recently, the finance ministry had asked public sector banks to ensure that the institutions did not charge a loan rate in excess of 24 per cent.
According to analysts, vis-à-vis urban lending MFI lending rates in rural areas are quite high.