AP Microfinance Act, 2010

o o o AP Govt passed an ordinance in October 2010 following allegations of borrower suicides due to coercive techniques used by MFIs to recover loan instalments. The ordinance was later replaced by the Act in 2010. The key tenets of the act are: Mandatory for all MFIs including existing MFIs in Andhra Pradesh to register with the District Registering Authority MFIs cannot grant or recover loans without obtaining registration from the Registering Authority. The registration is valid for a period of one year and an application for renewal should be made 60 days before the expiry of one year. The Registering Authority can either grant or refuse renewal of registration after due verification and hearing of objections if any. Under Section 5 of the Ordinance, the Registering Authority may, at any time, either suo moto or upon receipt of complaints by Self Help Groups or the general public cancel the registration of the MFI after issuing notice and affording reasonable opportunity to show cause against such notice. Key restrictions on MFIs: MFIs are prohibited from lending to SHGs that are already covered by formal banking system without the prior approval of the banks. The recovery system has to be changed to monthly instead of weekly. The meetings with borrowers have to be within the premises of a prominent government building such as the village panchayat office. The rate of interest being charged has to be displayed at prominent places and cant be changed later on. MFIs cant seek collateral (pawn, pledge or any other security) and any collateral already obtained has to be released. MFIs cant extend further loans to a SHG if there is already a loan outstanding without approval by RA. MFIs cant deploy agents or use coercive techniques to recover loans. The amount of interest cant be greater than the principal an if instalments upto twice the principal have been paid, then the loan would stand discharged and the excess would be refunded.

Malegam Committee Recommendations o A separate category of NBFCs be created as NBFC-MFI. Such NBFCs must have at least 90% of their total assets as qualifying assets. o Qualifying assets to be defined as: Borrowers annual household income <=50000 The loan amount and the total indebtedness of the borrower including this loan <=25000 The tenure of the loan >=12 months if loan amount less than 15000 else >=24 months, with a right to prepayment without penalty. No collateral on the loans. At least 75% of the total loans have to be given for income generation purposes. The loan is repayable weekly, fortnightly or monthly at the choice of the borrower. o A NBFC that is not a NBFC-MFI cant give more than 10% of its total loans to the MF sector. o There should be a margin cap of 10% for NBFC MFIs with outstanding loan portfolio >100crores and 12% for others. Interest should be capped at 24%. o There should be only 3 components in the pricing of a loan: Processing fee, <=1% of the gross loan amount. Interest charge Insurance Premium only actual cost, no admin charges. o The rate of interest should be prominently displayed and every borrower should have a loan card showing the borrowers identity, rate of interest, other T&C, instalments repaid and discharge of the loan in the local language. o Standard Loan agreement, no security deposit. o Regulations regarding borrowers: Lend only to members of SHGs and JLGs A borrower cant be a member of more than one such group. Not more than 2 MFIs can lend to the same borrower. Loans must have a minimum moratorium period. Loans in violation of this cant be recovered till all prior existing loans are fully repaid. o All sanctions and disbursements to be done at a central location and no coercive methods to be used for recovery. o Minimum recommended net worth for NBFC-MFI is 15 crores. o Provisioning Norms: Higher of the two: 1% of outstanding loan portfolio OR 50% of loan instalments overdue for >90days + 100% of instalments overdue for >180days. CAR of 15% and all Net Owned Funds as Tier I capital. Bank lending to MFIs continue to enjoy Priority Sector Lending Status, but status is cancelled if the MFI doesnt follow regulations.