By Dinesh Unnikrishnan, Livemint

Andhra Pradesh insists that it won’t change a stringent new law that has brought the activities of microfinance institutions (MFIs) to a virtual halt in the state that accounts for one-fourth of the Rs.20,000 crore industry.

This runs counter to the conclusion of a panel set up by the Reserve Bank of India (RBI) that the state law “will not survive” if the recommendations it has made are accepted.

“That does not change our stand,” Reddy Subramaniam, principal secretary of the Andhra Pradesh government, said in a phone interview. “We are fully aware of the situation.”

He was asked whether the panel recommendations covering contentious issues such as high interest rates and over-lending would suffice to replace the state Act.

RBI is currently in the process of studying the proposals made by the Y.H. Malegam panel on MFIs.

Top central bank executives, including deputy governor K.C. Chakrabarty, are likely to meet Andhra Pradesh government officials and senior bureaucrats of some other states on 22 February to discuss the effects of dual regulation, according to two persons familiar with the development.

Subramaniam confirmed that RBI has called a meeting on 22 February for feedback from the Andhra Pradesh government on the Malegam committee report.

The banking regulator may seek a consensus on MFI regulations by asking states not to promulgate separate laws on the sector, said one of the persons cited above. “This (states having separate regulations) can create huge difficulties for MFIs operating in multiple states,” said the person, who heads a Hyderabad-based MFI.

Nearly 80% of the industry is controlled by MFIs that are incorporated as non-banking financial companies (NBFCs). A proposed Central microfinance Bill, yet to be tabled in Parliament, envisages the National Bank for Agriculture and Rural Development as the regulator for smaller MFIs.

Next week’s meeting assumes significance in light of the Malegam panel’s contention on the state law.

“We would, therefore, recommend that if our recommendations are accepted, the need for a separate Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act will not survive,” it had said.

Malegam amplified on this aspect in a Mint interview on 28 January.

“There is no harm in a state having its own law. But the difficulty is that if an MFI operates in five different states and each state has its own law, and in addition there is a regulation by RBI, then how will it manage its operations?” he had said.

The state law came about in mid-October to check coercive practices allegedly followed by certain microlenders, making it necessary for MFIs to register their details and get government approval to give a second loan to a borrower. It also asked MFIs not to collect their instalments weekly at the doorstep of debtors.

MFI collection rates crashed to 10-15% in the state from more than 90% till October. It also narrowed MFIs’ access to bank finance and forced many of them to stop fresh disbursals to borrowers.

MFI officials said if the state government did not make changes in the law or repeal it, the lenders, especially, smaller firms, will be badly hit.

“There is definitely a state of duality of regulation,” said Alok Prasad, chief executive officer of industry lobby Microfinance Institutions Network. “That duality can go away only if the Central government comes with a Central legislation, which clearly says that regulation of NBFC-MFIs should only be within the regulatory ambit of the Reserve Bank and not with state governments.”

Prasad said the Andhra Pradesh government is caught in a political bind and scrapping the law won’t be easy.

“It will require strong political will for repeal to take place,” he said. The Andhra Pradesh government “can still create conditions on the ground by which MFIs are able to operate and carry on their normal business activities by framing rules that are helpful”.