MFIs in AP may face dual regulation

Microfinance institutions in Andhra Pradesh are likely to face dual regulation (from the RBI and the State Government) with the latter keen on continuing with its stringent Microfinance Regulation Act.

The State Government, which was the first in the country to put in place an act to check “excesses” of MFIs, is meeting top officials of the RBI to inform them that the MFI Regulation Act is going to stay notwithstanding the apex bank's view on the Malegam panel's report.

“We have been called for a meeting with the RBI on February 22. Our position is that the AP Act is here to stay and the RBI is not empowered to ask the Government to repeal the Act,'' Mr Reddy Subrahmanyam, Principal Secretary, Department of Rural Development, Government of Andhra Pradesh, told Business Line here.

The Malegam Committee in its report, submitted to the RBI last month, has recommended that the RBI should be sole regulator of NBFC-MFIs, among other proposals.

“This is not viable. The RBI in Hyderabad had about 250 staff. How can it regulate MFI activities in over 40,000 villages? Further, self-regulation of MFIs, as mooted by Malegam, has never worked in the MFI sector till now as a profit motive is involved,'' the official said.

CONSITUTIONAL IMMUNITY

The State Government had already communicated its “strong objections” on the Malegam's report to the RBI. It also points to the Constitutional immunity enjoyed by the AP Act, thereby contesting the view that the need for AP act “will not survive” if the Malegam report is accepted.

According to the list II of the Constitution, the regulation of money-lending is the original jurisdiction of the State Government.

“An Act is the will of the people. Accordingly, whether the need for AP MFI (Regulation of Money Lending) Act exists will be decided only by the AP legislature and not by the RBI,'' says the communication.

It also points out many lacunae in the Malegam's recommendations such as lack of provision for relief on a large amount of outstanding loans with interest ranging from 28 to 60 per cent.

DUAL REGULATION?

Given the situation, MFIs in the largest market of the country, which accounts for about 30 per cent of total outstanding portfolio of Rs 33,000 crore, are likely to go under dual regulation soon.

“We don't have any problem if the RBI bothers itself with corporate governance of MFIs, solvency and capital issues. But the State Government is responsible for regulation of money-lending in whichever form it occurs,'' Mr Subrahmanyam said.

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