The Macro Problems of Microfinance Industry in India - Part I

The first quarter of this month has brought to the frontline the traditional non ending tussle between the judiciary and the executive. The proponents of constitutional theory of separation of power have criticized the recent orders by Supreme Court in Black Money Case, Salva Judum Case, 2G Scam Case, etc. as clear instances of judicial overreach while others have shown their respect to these new horizons of judicial activism. In the situation where Center is witnessing a tough time in keeping the ball in its Court, the recent criticisms raised by the Andhra Pradesh government on the proposed Microfinance legislation by the Union Government has depicted that the Union also has to pass the constraints posed by federal structure of Indian polity. It would be an interesting story from herein to observe the Union’s moves when it is getting setbacks from two governance models of constitutional framework of India.

The release of recent draft of Micro Finance Institutions (Development and Regulation) Bill, 2011 by Finance Ministry marks a new development which once again depicts the overenthusiastic approach of both the Center and the State to regulate the Rs. 20,000 crore microfinance industry in India. It would be worth shooting aimlessly without acquainting the reader with background of this battle. I propose to cover different issues including but not limited to the background of MFI crisis, the government’s response to handle this crisis, quest for regulation of MFI sector and analysis of proposed Bill in a series of posts.

Microfinance as a genre of microcredit denotes a practice of providing small, working capital loans and other financial services to poor individuals who are unable to obtain access to commercial sources of credit. Once considered as next big thing in terms of investment, the definition of microfinance has undergone a significant change in the recent era. There has been a shift in the orientation of microfinance institutions from ‘reaching the unreached’ with not for profit model to ‘commercial banking activities’ with a for-profit model. In this process, much more than the profits generated by these institutions and the heated arguments accumulated by both critics and enthusiastic of microfinance institutions, it is the poor and vulnerable members of the society who have witnessed the agony of paying high interest rates and ostensibly making their loans ‘evergreen’. The plight of aam aadmi in the State of Andhra Pradesh captured the front page of newspapers across the nation wherein allegations were made that the strict and often barbaric debt recovery methods used by the MFIs, and their explosive growth rates since the beginning of the decade, had led as many as 200 borrowers to end their lives. Soon the State intervened with passing of the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Ordinance, 2010, which restricted the freedom of operation of the MFIs in the state and MFIs witnessed a sharp fall in loan recovery. To address this situation and to provide relief to both common man and MFIs, the Central regulator – the Reserve Bank of India (RBI) constituted a committee under the chairmanship of Mr. Y.H. Malegam to look into issues relating to MFIs which submitted its report in January 2011. The report essentially mooted for the self-regulatory framework for MFI sector and provided an exhaustive list of recommendations which received mixed response from the critics and the enthusiastic supporters of microfinance. Andhra Government officials went public by stating that they are not bound by the recommendation posed by the committee and they would continue to regulate the microfinance sector by the State law only. Once again the Center responded to the situation with the release of Draft MFI Bill, 2011. The next post would continue the discussion on the new bill and the controversy involved therein.

Ground Realities

The Supreme Court recently in the case of Nandini Sundar and Ors. v. State of Chhattisgarh declared the appointment and arming of Special Police Officers (SPOs) by the State of Chhattisgarh for counter insurgency purposes in naxal affected areas as unconstitutional. Despite the judgment being criticized by many as being a “judicial lecture” to the executive, it has far reaching ramifications for the state. The debate about the separation of powers and to what extent the court should be willing to enter the domain of executive policy is an endless one. This judgment needs to be appreciated in the light of the of the insight and accuracy that the court has exhibited in terms of clearly discerning for itself the real purposes of the entire scheme of the State of Chhattisgarh in the appointment if SPOs in the affected areas. At the outset it needs to be understood that it was a writ petition in the Supreme Court, hence, the evidence of particular facts can be taken only on affidavit. Therefore the court is always constrained as regards both the accuracy as well as the sufficiency of facts to decide a case a particular case. Yet the Supreme Court quite amazingly could discover the true stand of the Government in relation to the whole structure that it had put in place, which conveniently has been referred to “Salwa Judum”. The claim of the state was that the SPOs were recruited only for the purposes that they could act as “guides, spotters and translator” and would work as a source of intelligence. The essence of the argument was that the SPOs would only have roles in the nature of assistance to the main security forces in the above manner and that they would not be deployed in the main battle field against the naxalites/extremists. To a question by the court as to why providing the SPOs with firearms was necessary considering their non combative role, the state replied that it was for their “self- defence”. The court keeping in mind the fact that in national security matters “the court usually does not seek to interfere in security considerations”, however, its intervention is imperative so as to “safeguard constitutional values and goals, and fundamental rights such as equality, and right to life.” The court then reading from the very affidavit submitted by the state pointed out the fact that 170 SPOs have been killed and more than 117 of them have been injured in the last five years itself belies the claim of the state that the role of the SPOs were merely confined to non-combative operations. Furthermore the court was quick to analyse the reality that in attacks on relief camps set up by the state in various naxal affected areas the SPOs would undoubtedly get involved in what it termed as “fierce battle” with the naxalites. In the light of this fact the court held in very strong terms that the whole purposes of recruiting poor tribal youngsters as SPOs was to have them as “cannon fodder in the killing fields of Dantewada and other districts of Chattisgarh.” This court asserted was a violation of article 21 of the constitution in as much as their lives were put in direct danger by the state without putting in adequate safeguards in place. The fact that these tribals were not even given proper training for combative roles was an outright abdication of the responsibility of the stare which is to ensure that the life and liberty of its citizens were protected. Insufficiency of training coupled with the imminent danger from the operations they were subjected to was a total negation of constitutional values. Inspite of the fact that the SPOs were expected to perform all the duties of the regular police officers, be subject to all the liabilities and disciplinary codes, as members of the regular police force, and yet receive only an “honorarium” from the central government. They are completely deprived of all the other benefits which the regular forces are entitled to receive. The court could clearly see that “issues of finance have overridden other considerations such as effectiveness of such SPOs and of constitutional values.” This was held to be an outright violation of article 14 of the constitution which guarantees equal treatment to all. Furthermore the fact that these young tribals were being subjected to the same level of danger as any other member of the regular force who have much better training and education and possess much better capacities to deal with counter insurgency operations, was tantamount to treating “unequals as equals”, which is an outright violation of article 14 of the constitution.

It is submitted that the 58 page opinion of the Court though appearing to be rhetoric in the beginning, has not been welcomed in the manner it should have been. Under the circumstances where the Union had forgotten its constitutional mandate under Article 355 of the Constitution, the Court was very well justified in bringing the ground realities to the forefront and to maintain the rule of law. Critics have failed to appreciate the context in which Court remarked that “the primordial value is that it is the responsibility of every organ of the State to function within the four corners of constitutional responsibility. That is the ultimate rule of law.” It would be very interesting story now when this attitude of the Court is being characterized by the State as ideological rather than a step forward to maintain the rule of law. Reports suggest that the Chief Minister of Chhattisgarh has already hinted on filing review petition against Salwa Judum decision.