As a researcher who is keenly interested in the operational dynamics and scope of finance (macro as well as micro level), the recent crisis in the micro finance industry and the government response has been fascinating for a number of reasons. The first reason for the interest is that on close scrutiny if the government response to the crisis were to be sustained without any dilution, then investors in micro finance companies may be better off designing new business models for their companies. The existing business models are at a risk of becoming redundant if the recently promulgated Ordinance in Andhra Pradesh is implemented in letter and spirit. The micro finance business in its present form is probably facing its first important regulatory challenge as the Rural Development Minister, Mr.Vatti Vasanth Kumar has stated that he has directed District collectors to see that MFIs stopped their weekly collections forthwith and immediately switch to monthly collections (The Hindu, Hyderabad Edition, 24 October 2010) - like most of the formal and many informal financiers.
The Ordinance (officially titled “Andhra Pradesh Micro Finance Institutions (regulation of money lending) Ordinance, 2010”) is far reaching in its scope and this probably why the MFIs are vigorously lobbying the Ministry of Finance, Government of India to use their good offices to dilute the AP Ordinance. Some of the excellent and important features of the ordinance are reproduced and analysed in the following lines. MFIs claim that they do not fall under the purview of the State Government and instead they are under the purview of the Reserve Bank of India, which peculiarly has chosen to take a bureaucratic way: appoint a committee that would go into the problem. The MFIs do not seem to understand that these MFIs are breaking other clauses in the Indian Penal Code and importantly law and order as well as people’s welfare is a state subject. While credit delivery to the poor is an (or more likely was) an important contribution of the MFIs in the past, usury and harassment are not.
The Ordinance (officially titled “Andhra Pradesh Micro Finance Institutions (regulation of money lending) Ordinance, 2010”) is far reaching in its scope and this probably why the MFIs are vigorously lobbying the Ministry of Finance, Government of India to use their good offices to dilute the AP Ordinance. Some of the excellent and important features of the ordinance are reproduced and analysed in the following lines. MFIs claim that they do not fall under the purview of the State Government and instead they are under the purview of the Reserve Bank of India, which peculiarly has chosen to take a bureaucratic way: appoint a committee that would go into the problem. The MFIs do not seem to understand that these MFIs are breaking other clauses in the Indian Penal Code and importantly law and order as well as people’s welfare is a state subject. While credit delivery to the poor is an (or more likely was) an important contribution of the MFIs in the past, usury and harassment are not.
All MFIs will have to register within 30 days from the commencement of the ordinance with a registering authority in each district. No MFI will be allowed to grant loans or recover loans without registering. Each year the MFIs will have to apply for renewal of the registration. The Registering authority will decide within 15 days whether they should grant license after due verification of the performance of the MFIS in the field level and after objections (if any) from the general public regarding extension of registration (Clauses 3(1-4)).
The importance of these clauses is that there is a welcome scope for public pressure in future that could emerge as an important source of pressure that would force public representatives to take cognizance of the intimidation by MFIs in future. Nothing works better on the political class than pressure by voters and outcry in the media. The fact that the MFI has to renew its license every year means that it is here that the government has exceptional leverage as they can deny the renewal of the license if there are any complaints. While it is likely that in most cases the licensing authorities may find means to profit from renewal, it would be problematic for those that have a history of intimidation and having an elastic conceptualization of the law.
Clause 6 of the ordinance states that no member of an SHG shall be a member of more than one SHG and in case they are members of more than one SHG they have the option to retain membership of one of SHG and terminating the others. They are expected to repay their loans within a period of three months from the commencement of the ordinance.
This is an important attempt by the government to see to it that MFIs don’t push credit to people who cannot simply repay it. It is pertinent to note that MFIs have of late been pushing credit in order to meet their targets and importantly they are pushing credit to those borrowers who don’t have any hope of repaying it. It is indeed surprising that the culture of borrowing that these MFIs have created has actually led to greater indebtedness rather than reducing it. It is indeed shocking that there are instance where MFIs have lent more than one lakh to agricultural labourers (a few of whom subsequently committed suicide to escape harassment from the thugs of the MFIs).
This is an important attempt by the government to see to it that MFIs don’t push credit to people who cannot simply repay it. It is pertinent to note that MFIs have of late been pushing credit in order to meet their targets and importantly they are pushing credit to those borrowers who don’t have any hope of repaying it. It is indeed surprising that the culture of borrowing that these MFIs have created has actually led to greater indebtedness rather than reducing it. It is indeed shocking that there are instance where MFIs have lent more than one lakh to agricultural labourers (a few of whom subsequently committed suicide to escape harassment from the thugs of the MFIs).
Clause 9(1) states that No MFI shall recover from the borrower towards interest that is in excess of the principal amount. Clause 9(2) states that those who have repaid an amount equal to twice the amount of the principal shall stand discharged and the borrower shall be entitled to a refund.
Whether the MFIs refund the amount of not, the fact that this problem seems to have been widespread enough to force the government to react is in itself indicative of the usurious nature of the MFIs. The Government, especially the Reserve Bank of India should realize that they should not encourage the creation of a corporatized version of a usurious money lender.
Whether the MFIs refund the amount of not, the fact that this problem seems to have been widespread enough to force the government to react is in itself indicative of the usurious nature of the MFIs. The Government, especially the Reserve Bank of India should realize that they should not encourage the creation of a corporatized version of a usurious money lender.
Clause 10(1) states that no MFI shall extend further loan to a SHG or its members where the SHG has an outstanding loan from a bank unless the MFI obtains the prior written approval from the registering authority. Clause 10(4) states clearly that no MFI shall grant loan to a member of SHG during the subsistence of two previous loans irrespective of the source of the previous two loans.
This measure, if properly implemented, would go a long-way in restraining (at least partly) excessive borrowing from members. This is not to mean that there will be no other lender. I would not be surprised if MFIs themselves take a leaf out of the books of the informal financiers where they lend without official records.
This measure, if properly implemented, would go a long-way in restraining (at least partly) excessive borrowing from members. This is not to mean that there will be no other lender. I would not be surprised if MFIs themselves take a leaf out of the books of the informal financiers where they lend without official records.
Clause 11 is probably one that actually lead to a successful prosecution of an MFI over the long-term. Various clauses state that the MFI is expected to maintain clear accounts of their books, provide very clear information about the loans taken, interest rates charged and the repayment schedule as well as actual repayments made – something which most of them clearly do not. This not peculiar to the MFIs alone, it is in the very nature of the informal finance business.
Clause 11(6) lays down that all tranches of the repayment shall be made by the group at the office of the Gram Panchayat only.
Clause 11(7) clearly states that MFIs shall not deploy any agents for recovery nor shall use any other coercive action either by itself or by its agents for recovery of money from the borrower; and any form of coercive recovery including but not limited to visiting the house of the borrower shall, apart being punishable under the provisions of the ordinarnce employer the Registering Authority to suspend or cancel the license of the MFI.
Little wonder that the MFIs are jittery. With one stroke the government has removed the ability of the MFIs to coerce the borrowers while collecting the loan. Political society in India and electoral dynamics state that local borrowers are far more important than an ‘outside’ moneylender (even if it is a corporate one). At one stroke the government has also provide sufficient legal ground for the police and other agencies to protect the borrowers, thereby altering the fundamentals of the lending-borrowing business.
Clause 11(6) lays down that all tranches of the repayment shall be made by the group at the office of the Gram Panchayat only.
Clause 11(7) clearly states that MFIs shall not deploy any agents for recovery nor shall use any other coercive action either by itself or by its agents for recovery of money from the borrower; and any form of coercive recovery including but not limited to visiting the house of the borrower shall, apart being punishable under the provisions of the ordinarnce employer the Registering Authority to suspend or cancel the license of the MFI.
Little wonder that the MFIs are jittery. With one stroke the government has removed the ability of the MFIs to coerce the borrowers while collecting the loan. Political society in India and electoral dynamics state that local borrowers are far more important than an ‘outside’ moneylender (even if it is a corporate one). At one stroke the government has also provide sufficient legal ground for the police and other agencies to protect the borrowers, thereby altering the fundamentals of the lending-borrowing business.
Clause 12 makes it mandatory for an MFI to file a monthly statement to the Registering Authority before the 10th day of every month giving a list of the borrowers, the loan given to each and the interest rate charged on the repayment mode.
This makes backdating almost impossible. Considering the fact that RTI is a powerful additional tool for those who are well versed in the law, the MFI business just got more difficult – of course, subject to the condition that it is actually implemented and not diluted.
This makes backdating almost impossible. Considering the fact that RTI is a powerful additional tool for those who are well versed in the law, the MFI business just got more difficult – of course, subject to the condition that it is actually implemented and not diluted.
Clause 13(2&3) gives the Registering Authority the right to search and seize records as well as to summon and examine the officials of the MFI or any person who in his opinion is in a position to furnish the relevant information.
Anybody with knowledge of history would clearly know that it is precisely this power that was vested with the Securities and Exchange Board of India (SEBI) that brought about a semblance of order to the wild west of the Indian stock markets in the 1990s and the first decade of this century. Hopefully, this should give us similar results in the case of the microfinance industry.
Clause 14 enables any member of SHG or any member of the public to file a complaint regarding violation of the provision of the Ordinance by the MFI before the Registering Authority. Clause 15 also provides for the establishment of fast track courts.
Clause 16 is probably the best consumer protection measure passed in recent years by a government. It is comprehensive, very elaborately and clearly explains that all persons connected with an responsible for day-to-day control, business and management of a MFI including partners, directors, and the employees who resort to any type of coercive measures against SHGs or its members of their family members shall be liable for punishment of imprisonment which may extend up to a period of three years or with fine which may extend to one lakh rupees or with both.
Under this clause it is elaborately explained that MFIs cannot: obstruct, use violence or insult or intimidate the borrower or his family or persistently follow the borrower or his family member from place to place or interfere with any property owned or used by him or depriving him of, or hindering him in, the use of any such property, frequent the house or nay other place where the other person resides or works, or carries out business, move or act in a manner which causes or is calculated to cause alarm or danger to the person or property of such other person or seek to remove forcibly any document from the borrower which entitles the borrower to a benefit under any government programme. In case of any violation of these then not only are the provisions of the Code of Criminal Procedure, 1973 shall apply but the proceedings will be before a Fast Track Court.
With One stroke the MFIs are worse off then the NBFCs and places them on equal footing as the informal lenders, if not worse.
Clause 20(2) provides immunity to those who expose in good faith the violations of the Ordinance by MFIs.
An important lesson that the government, lenders and borrowers need to learn is that creating a culture of borrowing and lending that would have their long-term interests in mind would go a long way in balancing the interests of all the stake holders. Lenders should keep in mind that the culture of credit in India is such that a debtor would borrow any amount of money despite knowing very well that they cannot hope to repay it. Lenders should realize that when a borrower is ready to borrow at usurious interest rates they are well on the road to default as business environment in India doesnot generate profits to the tune that may be needed to repay such high cost of carrying out business.
An important lesson that the government, lenders and borrowers need to learn is that creating a culture of borrowing and lending that would have their long-term interests in mind would go a long way in balancing the interests of all the stake holders. Lenders should keep in mind that the culture of credit in India is such that a debtor would borrow any amount of money despite knowing very well that they cannot hope to repay it. Lenders should realize that when a borrower is ready to borrow at usurious interest rates they are well on the road to default as business environment in India doesnot generate profits to the tune that may be needed to repay such high cost of carrying out business.
