Today the Governor of Andhra Pradesh E S L Narasimhan gave his assent to the Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance, 2010 thus making it into a law which would come into effect immediately.
The government of Andhra Pradesh was forced to introduce this bill to check the rising unrest in the state of Andhra Pradesh after media reports of MFI’s alleged coercive practices led to public outcry and backlash.
Speaking to CNBC- TV 18, Mr Vatti Vasantha Kumar, Minister for Rural Development of Andhra Pradesh said “ The interest rate declared by the MFIs is different from the actual and indirect rate that includes hidden charges. If you take the hidden charges into consideration, the interest rate ranges from 50% to 84%.”
The Ordinance now makes it mandatory for all Microfinance Institutions in Andhra Pradesh 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 starting from Friday.
The government has stated that the objective of the ordinance is to clamp down on unregulated lending by MFI’s. The state government has said it will soon come up with a financial package to assist MFI clients who are burdened with debt. Arrangements for the swapping of high-cost debt of MFI customers with low interest-bearing loans by banks are being made.
Some of the other provisions of the Andhra Pradesh Microfinance Institutions Ordinance 2010 are:-
- MFIs will now have to specify the area of their operations, the rate of interest, and their system of operation and recovery while registering with the Registering Authority.
- The Registering Authority may, at any time, either suo moto or upon receipt of complaints by Self-Help Groups (SHGs) or the general public can cancel the registration of the MFI after assigning sufficient reasons.
- The MFIs cannot seek collateral from a borrower by way of pawning or any other security and they will now be required to display the rates of interest rates charged by them in prominent places at their offices.
- MFI’s cannot charge any other amount from the borrower except the charge prescribed in the Rules for submission of an application for grant of a loan.
- The ordinance also states that the amount of interest should not be in excess of the principal amount.
- MFI’s cannot extend a second loan unless the first loan has been fully paid off.
- The MFIs will now be required to submit a monthly statement to the Registering Authority giving the list of loanees, the loan given to them, and the amount of interest charged on these new loans.
- MFI clients can now complain to the Registering Authority in case of any problems and they can also call the grievance cell through a toll-free number – 15532.
- The Ordinance also mandates that only those staff members with identity cards can go for recovery and which can be done only in a public place. This is to check the use of rowdy elements by MFI’s for loan recovery.
- The state government will soon establish fast track courts after consultation with the High Court for settlement of disputes of civil nature.
- All those connected with errant MFI’s would be liable for punishment of imprisonment for up to three years or a fine up to Rs 1 lakh or both if they resort to any coercive measures.
- The Ordinance also mandates SHG members cannot take a second loan without the permission of the Registering Authority.
- The bill does not specify a cap on Interest Rates that can be charged.
Update – 18/10/2010
As per the latest information we have received from our sources, all MFI’s are required to suspend collections until they have registered with local authorities in every village where they operate. Nobody is sure about what the procedure is or how long it would take for an MFI to get registered.
Update – 20/10/2010
Download a pdf copy of Andhra Pradesh Microfinance Institutions Ordinance 2010