With SKS Microfinance challenging Andhra Pradesh’s controversial microfinance law in the Supreme Court, India might soon have an answer to the question: who should regulate microfinance institutions (MFIs), the Centre or the states?
This is a question that needs an immediate answer. As non-banking finance companies (NBFCs), MFIs are regulated by the RBI. Being financial corporations — as per the Seventh Schedule of the Constitution — they come under the Centre. See them as moneylenders and the same Seventh Schedule makes them a state subject.
This ambiguity in law is one reason why, despite MFIs getting desperate, neither the RBI nor the finance ministry can get the Andhra Pradesh government to abandon the Act.
The ambiguity has been around for some time. A couple of years ago, the Kerala government asked NBFCs such as Shriram Transport Finance Co and Muthoot Finance to register under the Kerala Moneylending Act. The NBFCs argued that this would be tantamount to double regulation and that they came under the purview of the RBI. For its part, the state argued that malpractices by NBFCs could create a law-and-order problem. And, consequently, NBFCs had to be answerable to state government as well.
This narrative is now unfolding between SKS and the Andhra Pradesh government. In its affidavit to the Supreme Court, SKS has questioned the state’s “legislative competence... to regulate the activities of a non banking finance company”. As NBFCs, the affidavit argues, MFIs are “registered and controlled by the RBI”.
The state government disagrees. “Regulation of moneylending is the original jurisdiction of the state government as per the List II of Schedule VII of Constitution. The state government has the responsibility of protecting the poor from exploitation of moneylenders in whatever form and name,” says Andhra Pradesh principal secretary for rural development Reddy Subramanyam.
Interestingly, this is the position former RBI governor Y V Reddy took last year when he said microcredit institutions are institutionalised moneylenders, and could be governed by state legislations as issues relating to lending are a state subject.
When it hears the case in the third week of July, the apex court will have to factor in additional dynamics while interpreting the law. Vesting responsibility for regulating MFIs with the RBI is problematic as the apex bank has limited capability to monitor the industry’s conduct with borrowers. At the same time, allowing states to regulate MFIs is fraught as well. “Anything related closely to local politics is better off regulated from a distance,” says former IIM-A professor M S Sriram. In the case of Andhra Pradesh, what complicates matters further is that the state, through its selfhelp groups-bank linkage programme, competes with MFIs.
There are other complications. Apart from monitoring conduct, regulation also determines how an industry evolves. Given that, says microcredit advisory Microsave head Manoj Sharma, “the need for credit, savings, insurance and remittance services for the low-income segment does not have any state-level boundaries”. Finally, remember, the RBI oversees systemically-important financial entities.
So, does it make sense to take an Andhra Pradesh-like model — albeit with less red tape and discretionary power to bureaucrats — where the financial regulation of MFIs sits with the RBI, while the state government monitors the MFIs’ behaviour with borrowers? That will not work in the long run, feels Sriram. We should strive for greater oversight by the RBI and greater accountability of banks as they are the major lenders to microfinance institutions, he says. For his part, Nabard chairman Prakash Bakshi moots the creation of a “law, or, maybe, change existing IPC, CrPC and so on, that empowers someone locally to take charge and deliver justice or, at least, provide temporary relief from harassment”. Things are, on the whole, interestingly poised. The Andhra Pradesh Ordinance and Malegam are here. The Microfinance Bill is being worked upon.
The Supreme Court verdict should throw additional light. Slowly, the regulatory regime for MFIs falls into place.
This is a question that needs an immediate answer. As non-banking finance companies (NBFCs), MFIs are regulated by the RBI. Being financial corporations — as per the Seventh Schedule of the Constitution — they come under the Centre. See them as moneylenders and the same Seventh Schedule makes them a state subject.
This ambiguity in law is one reason why, despite MFIs getting desperate, neither the RBI nor the finance ministry can get the Andhra Pradesh government to abandon the Act.
The ambiguity has been around for some time. A couple of years ago, the Kerala government asked NBFCs such as Shriram Transport Finance Co and Muthoot Finance to register under the Kerala Moneylending Act. The NBFCs argued that this would be tantamount to double regulation and that they came under the purview of the RBI. For its part, the state argued that malpractices by NBFCs could create a law-and-order problem. And, consequently, NBFCs had to be answerable to state government as well.
This narrative is now unfolding between SKS and the Andhra Pradesh government. In its affidavit to the Supreme Court, SKS has questioned the state’s “legislative competence... to regulate the activities of a non banking finance company”. As NBFCs, the affidavit argues, MFIs are “registered and controlled by the RBI”.
The state government disagrees. “Regulation of moneylending is the original jurisdiction of the state government as per the List II of Schedule VII of Constitution. The state government has the responsibility of protecting the poor from exploitation of moneylenders in whatever form and name,” says Andhra Pradesh principal secretary for rural development Reddy Subramanyam.
Interestingly, this is the position former RBI governor Y V Reddy took last year when he said microcredit institutions are institutionalised moneylenders, and could be governed by state legislations as issues relating to lending are a state subject.
When it hears the case in the third week of July, the apex court will have to factor in additional dynamics while interpreting the law. Vesting responsibility for regulating MFIs with the RBI is problematic as the apex bank has limited capability to monitor the industry’s conduct with borrowers. At the same time, allowing states to regulate MFIs is fraught as well. “Anything related closely to local politics is better off regulated from a distance,” says former IIM-A professor M S Sriram. In the case of Andhra Pradesh, what complicates matters further is that the state, through its selfhelp groups-bank linkage programme, competes with MFIs.
There are other complications. Apart from monitoring conduct, regulation also determines how an industry evolves. Given that, says microcredit advisory Microsave head Manoj Sharma, “the need for credit, savings, insurance and remittance services for the low-income segment does not have any state-level boundaries”. Finally, remember, the RBI oversees systemically-important financial entities.
So, does it make sense to take an Andhra Pradesh-like model — albeit with less red tape and discretionary power to bureaucrats — where the financial regulation of MFIs sits with the RBI, while the state government monitors the MFIs’ behaviour with borrowers? That will not work in the long run, feels Sriram. We should strive for greater oversight by the RBI and greater accountability of banks as they are the major lenders to microfinance institutions, he says. For his part, Nabard chairman Prakash Bakshi moots the creation of a “law, or, maybe, change existing IPC, CrPC and so on, that empowers someone locally to take charge and deliver justice or, at least, provide temporary relief from harassment”. Things are, on the whole, interestingly poised. The Andhra Pradesh Ordinance and Malegam are here. The Microfinance Bill is being worked upon.
The Supreme Court verdict should throw additional light. Slowly, the regulatory regime for MFIs falls into place.
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