Kerala and Andhra Pradesh, two states in southern India, have mandated that non-banking financial companies (NBFCs) and microfinance institutions (MFIs) register under local moneylending laws, but The Shriram Transport Finance Company (STFC), an NFBC in India, has challenged this mandate in Supreme Court [1]. According to R. Subramanyam, Secretary of Andhra Pradesh’s Ministry of Rural Development, many illiterate borrowers in India often pay extremely high interest rates. If NBFCs and MFIs do register under local moneylending laws, then the governments of Kerala and Andhra Pradesh would have the power to invalidate the company’s state-specific banking license in the case that the institution is found to be charging interest rates that are deemed too high. Criteria on how this would be determined in Andhra Pradesh are not specified [1]. Kerala’s regulation law states that a moneylender is not permitted to charge more than 2 percent per year over the applicable Reserve Bank of India’s (RBI) interest rate [3].
STFC and Muthoot Finance, a gold-loan bank in India, have recently had to register themselves under the Kerala Money-Lending Act, which aims to “provide for the regulation and control of the business of money-lenders in the State of Kerala” [2]. STFC has challenged this mandate in Kerala’s Supreme Court, arguing that it is inappropriately being regulated under both the state and the RBI [1]. In Andhra Pradesh, the High Court has exempted MFIs (but not NBFCs) from registering under the Scheduled Area Moneylenders Regulations to prevent this dual regulation [1].
By Julia Korn, Research Associate
About The Ministry of Rural Development in India (MRDI):
Implemented by India’s government, the MRDI consists of three departments: The Department of Rural Development, The Department of Land Resources and the Department of Drinking Water Supply. The Ministry targets poverty alleviation, employment generation, infrastructure development and social security. The Ministry is also concerned with women’s empowerment and therefore dedicates a substantial amount of outreach to Indian women.
About The Reserve Bank of India:
Established in 1935, the Reserve Bank of India undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in banking fraud, assess the divergence non-performing assets and supervise the rating model for banking sector. RBI consists of twenty-two regional offices.
Sources and Additional Resources:
[1] The Economic Times. “AP, Kerala govts seek to regulate NBFCs, MFIs” by Arun Iyer on June 1, 2010. http://economictimes.indiatimes.com/news/economy/finance/AP-Kerala-govts-seek-to-regulate-NBFCs-MFIs/articleshow/5996474.cms
[2] The Kerala Money-Lenders Act, 1958. http://www.keralataxes.in/documents/KML%20ACT.pdf
[3] The Reserve Bank of India. “Cash Reserve Ratio and Interest Rates.” http://rbidocs.rbi.org.in/rdocs/Wss/PDFs/04T_F280510.pdf
MicroCapital Universe: The Ministry of Rural Development in India. https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=The…
MicroCapital Universe: The Reserve Bank of India. https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Res…
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