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Andhra assembly passes bill to rein in MFIs

Following reports of harassment by loan recovery agents and suicides by defaulters, Andhra Pradesh has passed a bill to discipline microfinance institutions

The Andhra Pradesh assembly passed a bill on December 14, 2010, to regulate the operations of microfinance institutions (MFIs) in the state. Andhra Pradesh is the largest market for microfinance institutions in the country, with 6.25 million borrowers.

The bill replaces an ordinance promulgated in October 2010 after complaints poured in of MFIs harassing borrowers for repayment of loans and several cases of suicide by borrowers -- 75, according to Women Development and Self-Help Groups Minister Sunitha Lakshma Reddy.

The Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Bill 2010 made no amendments to the ordinance as demanded by MFIs.

The ordinance retroactively waived loans where a sum of twice the principal had been repaid. It abolished the practice of collecting repayments on a weekly basis, and made monthly collection mandatory. MFIs want any public place to be a collection centre but the government has made the panchayat office the sole collection centre. The bill also requires all branches of MFIs in districts to be registered with the District Rural Development Agency. MFIs claim the agency has no competence to ascertain if a company is eligible to operate as an MFI or not.

MFIs cannot deploy any agent for recovery of loans or resort to coercive action under the new legislation.

The bill does not impose an interest cap on MFI loans, but puts the onus on MFIs to disclose the interest rates they will charge when they register.

Penalty for contravention of these provisions is imprisonment for a period of six months or a fine which may extend up to Rs 10,000, or both.

MFIs complain that their collection rate has fallen to 20% from 95% since the ordinance was enacted in October.

According to the Micro Finance Institutions Network (MFIN), a self-regulatory body of 44 top micro lenders, the legislation could hamper the repayment of Rs 7,400 crore of microfinance funding in the state, and Rs 24,000 crore in the country. It argues that if borrowers are encouraged to default en masse, the system will fall apart and a valuable financial product could become unviable.

Credit for the poor in rural areas is a major problem. It is ironic that interest rates for the poor are higher than interest rates for the rich. MFIs have to take into consideration the greater cost of reaching the poor and their comparatively low creditworthiness, but that does not make it easy for self-help groups and the like, who are major borrowers, to repay their loans. MFI’s say their rates are lower than that charged by informal moneylenders, who are often the only alternative. With no lending from MFIs, borrowers will go to private moneylenders, they warn.

Meanwhile, a recent study finds that borrowing from MFIs in Andhra Pradesh is less prevalent than many believe. Low-income borrowers, such as small farmers and daily wage earners, take only 11% of advances from MFIs and 82% from informal sources, according to a study by the Institute for Financial Management and Research (IFMR), a private organisation that works for financial inclusion, and the National Bank for Agriculture and Rural Development (NABARD). Its survey of 2,000 households showed that 85% of households reported multiple loans outstanding from informal sources, compared with 3% that reported multiple loans outstanding with MFIs.

Source:, December 15, 2010
  , December 14, 2010
 , December 14, 2010
           Business Standard, October 20, 2010
 , December 2010