MICROCAPITAL BRIEF: High Court of Indian State of Andhra Pradesh Upholds Microfinance State Law, Rejecting Microlenders’ Petitions

The High Court of the Indian state of Andhra Pradesh reportedly ruled to uphold the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010, despite petitions brought by Indian microlender SKS Microfinance and other microfinance institutions (MFIs) seeking to have the law repealed. The legislation, which was passed by the state assembly in December 2010, introduced regulations on the microfinance sector including restrictions on collections practices and a requirement that government officials approve each microloan before disbursal. “The court acknowledged the importance of the state law in order to protect the interests of self-help group (SHG) borrowers,” reportedly said Budithi Rajsekhar, chief executive of the Society for Elimination of Rural Poverty (SERP), an organization established by the Andhra Pradesh government. SHGs, which are usually composed of about ten women, make up a significant portion of microborrowers in the region.

In its ruling, the High Court acknowledged the authority of the Reserve Bank of India (RBI), the country’s apex bank, to govern MFIs and recommended the state government review the law with an eye toward the national Microfinance Institutions (Development and Regulation) Bill, 2012, which would establish countrywide regulations and end state-level regulation of microlending.

By Nicole Boyd, Research Associate

About Reserve Bank of India (RBI)
Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While non-banking financial companies such as for-profit microfinance institutions operate under RBI regulations, the responsibility for inspecting agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI owns a one-percent stake in NABARD as of 2011.

About SKS Microfinance
SKS Microfinance is a for-profit microfinance institution (MFI) was launched in 1998. SKS converted into a public limited company in May 2009 and launched an initial public offering on July 28, 2010. It since diversified into offering gold loans and loans to small stores. SKS currently trades on the Bombay Stock Exchange and India’s National Stock Exchange. As of September 30, 2012, SKS reported total assets of USD 354 million and a gross loan portfolio of USD 250 million disbursed to approximately 3.9 million borrowers. As of March 2012, SKS reported return on assets (ROA) of -45.8 percent and return on equity (ROE) of -111 percent. SKS does not accept deposits.

Sources and Additional Resources:

Livemint. “Court upholds Andhra law on microfinance,” http://www.livemint.com/Money/7wOwenOC6G0ozw1b0yOUTJ/Andhra-Pradesh-microfinance-law-upheld-high-court-suggests.html

MicroCapital. February 12, 2013, “MICROCAPITAL BRIEF: Microfinance institutions (MFIs) in India’s Andhra Pradesh Face Difficulties Even After Loan Restructuring, “Survival of MFIs” Said to Hang on Court Decision Regarding State Law,” https://www.microcapital.org/microcapital-brief-microfinance-institutions-mfis-in-indias-andhra-pradesh-face-difficulties-even-after-loan-restructuring-survival-of-mfis-said-to-hang-on-court-decision-regar/

MicroCapital. May 15, 2012, “MICROCAPITAL BRIEF: Union Cabinet of India to Present Microfinance Bill to Parliament,” https://www.microcapital.org/microcapital-brief-union-cabinet-of-india-to-present-microfinance-bill-to-parliament/

MicroCapital. February 28, 2012, “MICROCAPITAL BRIEF: 76 Criminal Cases Pending Over Alleged Role of Microlenders in Borrower Suicides in India’s Andhra Pradesh,” https://www.microcapital.org/microcapital-brief-76-criminal-cases-pending-over-alleged-role-of-microlenders-in-borrower-suicides-in-indias-andhra-pradesh/

MicroCapital. October 11, 2011, “MICROCAPITAL BRIEF: Supreme Court of India Sends SKS Back to Andhra Pradesh High Court to Challenge Microfinance (Regulation of Moneylending) Act of 2010,” https://www.microcapital.org/microcapital-brief-supreme-court-of-india-sends-sks-back-to-andhra-pradesh-high-court-to-challenge-microfinance-regulation-of-moneylending-act-of-2010/

MicroCapital. November 15, 2010, “MICROCAPITAL BRIEF: India’s Microfinance Industry on Brink of “Collapse” Due to Credit Freeze in State of Andhra Pradesh,” https://www.microcapital.org/microcapital-brief-indias-microfinance-industry-on-brink-of-collapse-due-to-credit-freeze-in-state-of-andhra-pradesh/

MicroCapital Universe Profile: SKS Microfinance, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=SKS+Microfinance

MicroCapital Universe Profile: Reserve Bank of India (RBI) https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

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