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AP, Kerala govts seek to regulate NBFCs, MFIs
BANGALORE: Two key southern states are demanding that NBFCs and microfinance firms register under the local money lending laws, seeking to muscle into the territory of RBI which has the authority to regulate these institutions.
Andhra Pradesh and Kerala have told some finance firms operating in their respective states that registration under local laws is a must. “Our aim is to prevent the tribals from being exploited. These illiterate people are often forced to pay very high rate of interests. We cannot be blind to the fact that many of the MFIs also lend at usurious rates, and hence, there is a need to regulate them,” says R Subramanyam, principal secretary of AP’s Panchayati Raj and rural development ministry. The AP Scheduled area Moneylenders Regulations, 1960, gives the government the power to revoke the licence if the agent (moneylender) is found charging high rates of interest.
The Kerala government has mandated that NBFCs such as Shriram Transport Finance Company (STFC) and Muthoot Finance register themselves under the said Kerala Moneylending Act, 1946, a point which has been challenged by Shriram in the Supreme Court.
The states’ move is likely to pit them against RBI, which regulates NBFCs and other financial institutions. Some firms are pushing back, arguing that states have no jurisdiction. “Many NBFCs also have micro finance business. NBFCs are regulated by RBI.
The Association’s argument is that bringing them under the Money Lender Act would amount to double regulation,” said Paul Thomas, managing director of ESAF Micro Finance & Investments and part of the Kerala NBFC Association.
The battle comes at a time of strong growth for the microfinance industry, which lends to small borrowers at high rates of interest. The growth has benefited the industry, driving some high profile firms to attract private equity investment and think of an IPO. It has also led to accusations that the lenders are charging very high rates and are using strong-arm tactics to extract money from poor borrowers.
“We want to help borrowers. They should not be charged high rate of interest. All those entities engaged in money lending have to register with us under the Act,” a senior official with the Kerala government’s commercial taxes department said.
In its draft red herring prospectus filed for the Rs 500-crore non-convertible debenture (NCD) issue, STFC has said the company has appealed to the Supreme Court against a Kerala High Court order of November 18, 2009, which upheld the state government action, asking the company to register under the Kerala Money Lenders Act. The High Court of Kerala had dismissed the company’s appeal filed against the state action. The Supreme Court has since stayed the high court order.
“The matter is sub-judice but we clearly believe that the state government cannot ask us to register with them as we are under the control of RBI,” a senior official of STFC told ET when queried about the development.
While the AP Act does not specify the interest rate to be charged by moneylenders, the Kerala Act stipulates that a registered moneylender cannot charge more than 2% over the prescribed RBI rate of interest.
MFIs, on the other hand, offer market-determined rates, which could be as high as 22-25%.
The AP High Court has exempted MFIs from registering under the AP Scheduled Area Moneylenders Regulations, but many MFIs are being cautious.
Two of the four MFIs operating in Bhadrachalam town in Khammam district (which falls within the tribal area where the AP Scheduled Area Moneylenders Regulations is applicable) have opted to move to the periphery of the tribal area at Bhurgampadu.
“We want to play safe, and hence, the move. However, this does create problems as our staff now have to travel more daily. The repayment had initially been hit when we moved our offices but it’s now back to around 97-98%,” an official with Spandana Spoorthy Financial told ET. There are four MFIs operating at Bhadrachalam town — SKS Microfinance, Spandana Spoorthy Finance, Share Microfin besides Basix. Together, they have lent around Rs 1 crore to borrowers.
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