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.
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