High court comes to the rescue of MFIs

The A P High Court on Wednesday asked the state government to explain as to what protective measures it envisaged for the micro finance institutions (MFIs) while implementing its recent ordinance that aims to regulate these MFIs.



The division bench comprising Chief Justice Nisar Ahmad Kakru and Justice Vilas V Afzalpurkar raised this question while hearing three separate petitions that challenged the ordinance.

SKS Micro Finance, Spandana Micro Finance and Micro Finance Institutions Network (MFIN) filed the writ petitions charging the state with encroaching into an area covered by the RBI Act and other central laws.

When P Niroop Reddy, counsel for SKS, told the court that the state has no role to play as it was already covered by the central regime, the bench observed: "the space that ought to govern MFIs is unoccupied so far.'' The RBI had perceived the scope for MFIs to reach out to the poor in delivering collateral-free micro credit to them and allowed us to operate in this area, the counsel said. But the state is proposing to regulate us, he added and urged the court to come to their rescue, or else "we will be nipped in the bud.''

S R Ashok, counsel for MFIN, too told the court that they would be badly hit if the court does not provide them enough safeguards against the penal provisions of the ordinance.

Vedula Venkata Ramana, counsel for Spandana, told the court that the state ordinance was enforced even before the implementation setup was put in place. "We have to now register ourselves with the District Rural Development Authority even though the format for doing so is not yet ready,'' he said. "As per the ordinance, we cannot go into the field, we cannot collect our dues and we cannot transact any business without registering ourselves,'' he said.

Niroop Reddy told the court that they have to collect Rs 1,400 crore outstanding from the field and because of the ordinance, their activities have come to a grinding halt. "We cannot even collect our principal amount now,'' he said.

At this stage, the bench asked advocate general D V Sitarama Murthy to consult the state government and find out by Friday whether the MFIs could continue their transactions like collection of the principal amount before the they begin the process of registration. "They too must have borrowed money from banks for an interest and they too will be under an obligation to repay,'' it said. The AG told the bench that the ordinance only seeks to regulate only those loan sharks who are profiting from the poor. The matter will come up for hearing again on Friday for further hearing.

via Times of India