AP govt finds no worthy regulator for MFI secotr

The Andhra Pradesh government is in no mood to cede its control over microfinance institutions in the state. It has called the Malegam panel report, which recommends that the sector not be regulated by state governments, lopsided, unclear and biased, reports Appaji Reddem.

The Andhra Pradesh government, which literally triggered the appointment of the RBI panel on microfinance companies, is not happy with the panel's recommendations. The state has the largest number of MFI borrowers, and had witnessed suicides by some borrowers, allegedly because of the high rates charged by MFIs. The Malegam panel had toured the state extensively for its report and has recommended, among other things, a cap of 24% on rates charged by the MFIS. In exchange, the panel had said there would be no need for the recent Andhra law which seriously regulates these companies. R Subrahmanyam Principal Secy - Rural Development, Andhra Pradesh Government however, disagrees. "What about the very high cost loans which they've taken and suffering with it. And in many cases the debt burden has reached such a stage of non-serviceability. There is no mention about it. The 24% interest cap suggested is only for prospective loans," he said. Clearly, the Andhra government is in no mood to accept Malegam's recommendations. The report recommends that MFIs should be regulated by themselves, by MFI associations, by the lead PSU banks in the district and by the RBI. It also suggests a network of ombudsmen but these are not good enough for the state. R Subrahmanyam justifies his discontentment saying "We have a feeling that there is greater reliance on the self regulatory nature by the MFIs, which we strongly believe, based on our experience in the past that it would not work. So, the very regulation they are proposing seems to be self-defeating in the absence of a proper implementation mechanism." Government sources in Hyderabad say the report is biased towards the health of the MFIs, rather than the customer welfare. They say the government has already written to RBI asking it to take a balanced view of the Malegam report. RBI ill-equipped to regulate? Incidentally, the Andhra government is not alone in its criticism of the Malegam recommendations. Veteran central bankers, who didn't want to be named, said that the RBI does not have the wherewithal to regulate MFIs and their dealings with their millions of small customers. The RBI does not have officers in every district, or even in every state, they say. Regulation of MFIs has to be done at best jointly with state governments, they say. It will be interesting to see how the RBI responds to the Malegam recommendations.