MICROCAPITAL BRIEF: SKS Microfinance May Challenge Andhra Pradesh Ruling in Supreme Court

In response to the February 2013 ruling from the High Court of the Indian state of Andhra Pradesh that upheld the Andhra Pradesh Microfinance Institution Act, 2010, SKS Microfinance, an Indian for-profit microfinance institution, and other unspecified microlenders reportedly may challenge the decision in the Country’s Supreme Court.While acknowledging the authority of the Reserve Bank of India (RBI), the country’s apex bank, to govern microfinance institutions, the ruling upheld regulations on the microfinance sector introduced by the 2010 Andhra Pradesh law that restricted collections practices and required that government officials approve the disbursal of each microloan in the state.

Opponents of the law, which was passed in response to suicides reportedly brought on by what the state deemed “coercive loan recovery tactics”, feel as if the dual state and federal regulation will make it difficult for microfinance institutions to remain profitable. The decision to challenge the ruling in the Supreme Court is contingent on the outcome of the national Microfinance Institutions (Development and Regulation) Bill, 2012, which would establish countrywide regulation and end all state-level regulation of microlending.

By Brian LeBlanc, 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) that 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.

About Microfinance Institutions Network (MFIN)

The Microfinance Institutions Network (MFIN) is a trade association of 47 Indian microlenders that operate as non-banking finance companies. MFIN is supported by the Omidyar Network, a US-based philanthropic investment firm, and the International Finance Corporation (IFC), a member of the World Bank Group.

Sources and Additional Information

LiveMint.Com article, February 20, 2013, “Microlenders May Move Supreme Court,” http://www.livemint.com/Industry/d7riF81uSWizKRxNzwfHdJ/Microlenders-may-move-Supreme-Court.html

MicroCapital story, February 20, 2013, “MICROCAPITAL BRIEF: High Court of Indian State Andhra Pradesh Upholds Microfinance State Law, Rejecting Microlenders’ Petition,” https://www.microcapital.org/microcapital-brief-high-court-of-indian-state-of-andhra-pradesh-upholds-microfinance-state-law-rejecting-microlenders-petitions/

MicroCapital story, 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 story, 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 story, 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 story, 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+(RBI)

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