Worried microfinance institutions (MFIs) have initiated dialogues with the Assam State government, the Reserve Bank of India (RBI) and the central government with respect to a recent state law. The law was enacted by the Assam government to control the operations of the microlenders following reports of coercive lending practices.
Certain provisions of the law, called The Assam Microfinance Institutions (Regulation of Moneylending) Bill, 2020, have put MFIs operating in the state in a tough spot. These include mandatory registration of MFIs within 30 days, collection of dues only at gram panchayat offices or at designated public places, among others.
Adding to their woes, ahead of assembly elections, local politicians have started promising loan waiver for women MFI borrowers. P Satish, executive director of Sa-Dhan, one of the prominent industry bodies of MFIs, said the organization has started dialogues with all stakeholders including the state and the regulator on the crisis.
Sa-Dhan has 225 members of which 160 are MFIs. Their total loan portfolio is around Rs 1,00,000 crores as of 30 September
However, Satish denied reports that Sa-Dhan is mulling to move the Supreme Court against the state law.
“We are not planning to move SC on the issue. Moving the SC is not on our agenda. Even in AP case we did not approach the SC,” said Satish. “We are talking to the state government to understand how they plan to go ahead. The law shouldn’t come as a hurdle to MFI operations,” Satish said.
MFIN, another leading industry association, too denied any plans to move to Supreme Court as of now. "There is no thought on this at this stage. We are talking to all stakeholders to understand this issue and find a way ahead," said MFIN CEO Alok Misra.
A similar industry crisis had happened in erstwhile Andhra Pradesh in 2010 when the state enacted a similar law. Following this, the RBI brought in new regulations to govern the sector.
Also, Sa-Dhan has moved to RBI to highlight the regulatory issues in the Assam MFI Bill, Satish said. “NBFC-MFIs operations are already covered under RBI Act. In that sense, to what extent a state can intervene in RBI’s turf needs to be ascertained, Satish said, adding, “we are drawing their attention to this issue.”
Microfinance Institutions Network (MFIn), another leading industry body, was not immediately available for comments. Assam is one of the prominent microlending markets in the North East part of the country.
A double whammy
More than the law itself, the promise of loan waiver of borrowers will likely do a bigger damage to the industry, according to industry officials. Both Congress and BJP politicians have made poll promises on loan waiver.
Past experience has shown that the moment politicians promise waiver, even honest borrowers stop repayments to their lenders resulting in total collapse of credit culture in that geography. During the 2010 Andhra Pradesh crisis too, banks and MFIs had seen a big spike in their bad loan levels after politicians gave a call to borrowers not to pay back to their lenders.
The AP Microfinance Bill which had imposed similar restrictions on operations of MFIs, especially with respect to collection of dues, had unleashed a crisis in the sector. This subsequently forced a significant number of MFIs to shut down or move out of the state.
What does the Assam law says?
The Assam MFI Bill has some elements that remind the draconian provisions of the controversial Andhra Pradesh Microfinance Bill. For instance, the Assam Bill stipulates that all MFIs in Assam need to apply for registration before the local authority within 30 days from the date of commencement of the Act. This registration is valid for a period of two years.
Secondly, according to the Act, all schedules of loan repayment shall be made by the borrower at the office of the Gram Panchayat or at a public place designated by the Deputy Commissioners.
Third, partners, directors, and employees of organisations engaged in coercive lending practices will be subjected to up to three years of imprisonment and Rs 1,00,000 fine.
Fourth, no MFI should extend a further loan to a borrower where s/he has an outstanding loan from a bank unless the MFI gets a prior approval.
Fifth, a borrower cannot be a member of more than one Self-Help Group (SHG) or Joint Liability Group (JLG) and not more than two MFIs can lend to the same borrower.
What lies ahead?
The two big problematic clauses in the Assam Bill are the rules that say MFIs can collect dues only at Gram panchayat offices or designated public places. Secondly, the requirement to get the registration done within 30 days could also create problems for many MFIs as the process can take a longer timeframe, Satish said.
If the state government implements the law strictly, it can lead to a crisis situation in the state’s microfinance sector much like the AP law. This can impact not just MFI but banks as well which operate in the microcredit segment “Banks will be more worried about the loan waiver talks rather than the law itself. This is because banks do not come under the Act but the loan waiver calls can hurt them for sure, “ Satish said.
According to Macquarie, the Bill will have a medium to potentially long-term impact on the growth of Bandhan Bank
in the state since its business is concentrated in the region. Shares of Bandhan Bank were trading nearly 3 percent down at Rs 380.15 a piece on the BSE.