Champions of Financial Inclusion

Tuesday, December 21, 2010

AP MFI Bill: A Regulation?

In the state of unrest, the MFI bill recently passed in the state of Andhra Pradesh has proved to be a relief for the customers of MF industry.  The bill which clearly defines the collection period and registration rules for MFI branches was passed in December second week in response to complaints over high interest rates, aggressive loan recovery practices and overextended borrowers. So, while the customers rejoice the result, the microfinance institutions are relieved over the state Governments silence on putting a cap on interest rates till now.

It has been pointed out that since the issue of the ordinance two months ago, collections of microfinance institutions in Andhra Pradesh have dropped.  Also, microfinance institutions are also struggling with liquidity crunch due to reduced bank lending and lessened equity infusion in the sector.( Follow the article at:  As quoted in Business Standard- Spandana’s CEO Ms. Padmaja Reddy said that many MFIs will close down their businesses. Operating costs would increase and profits margins would spread thin, she added. The company's recoveries have fallen to 30-50 per cent in the last two months and no fresh group loans have been given. (follow the news at:

While the bill is seen as disturbing to microfinance institutions, it is anticipated by the stakeholders that reduction in the number of repayment collection meetings per month to 1 will reduce a lot of overhead charges of travelling to the client centers which in-turn can either be seen as profit for the institution or, a factor for reducing the overall interest rate. It is also believed that this bill is, in a way, empowering the clients- especially the rural women.

But the basic questions here go unanswered. Is the bill of transitory nature as was the MFI ordinance that had come out in October this year? Is this bill achieving a win-win situation for both customers and service providers? And the answers here are not so simple. There are a lot of elements at play while we ponder over the state of things.

A lot of discussions are taking place at state and centre over the scope of bill and its outcomes. Even slightest gestures of customers to political parties are changing the fate of microfinance without knowing. 

I believe, in a move to revolutionize the microfinance industry, a lot of bills and amendments have to be passed before a true balance between social good and profit making is achieved.
-By Chitra Nayak