NEW DELHI: SKS Microfinance today challenged in the Supreme Court the special act passed by the Andhra Pradesh government to regulate micro finance institutions in the state after allegations that their high interest rates and strong-arm recovery methods led to suicides by farmers.
A bench of justices Markandey Katju and Gyan Sudha Mishra issued notice to the state government, directing it to file reply and posted the matter for hearing in the third week of July.
Senior Advocate Fali S Nariman, appearing for SKS -- the country’s largest and only listed micro finance company -- submitted that the state government has no power to regulate the sector.
The state government passed the Andhra Pradesh Micro Finance Institutions (Regulation of Money lending) Act, 2010, to ensure that it has oversight on the sector.
According to the petitioner, micro finance sector falls under the central list and is not a state subject on which the Andhra Pradesh government could pass any act.
SKS further submitted that the state government can regulate only the money lending sector and not the Non Banking Finance Companies (NBFCs), which are registered by the banking sector regulator RBI.
The company also cited some recent studies on the micro finance sector and contended that it was a central subject.
The Act empowers the state government to take action against micro finance companies, if they violate provisions mentioned in the section 9 and 16 of the Act.
SKS has requested the Supreme Court to immediately quash the section 10 of the act, so that it can continue its operations in the state.
Section 10 bar mircofinance institutions (MFIs) from giving loans to any SHGs (self-help groups) or its members, when they already have an outstanding loan from a bank.
They are also opposing another mandatory provision under the Act, which directs them to get registered in every district, along with the details of SHGs.
In such cases, MFIs will have to take prior approval from a special authority constituted under the Act by making an application.
It further states that only if the authority is satisfied that SHGs have understood the conditions of the loan and terms of repayment, and is beneficial for their family, it will give the nod.
It also says that no MFI would grant loan to SHG during the subsistence of two previous loans, irrespective of the source of the previous two loans.
Section 9 of the act bars micro finance companies from charging interest in excess of the principal amount, irrespective of the fact whether the loan was given out before or after commencement of the Act.
Section 16 says that persons responsible for day-to-day control, business and management of such institutions will be liable for punishment of imprisonment for up to three years, if the firm took any coercive measures against SHGs or the members of their family.
This applied on all employees of such institution including partners and their directors.
Earlier, SKS had moved the Andhra Prsdesh High Court, but failed to get any interim relief over the sections 10, and the matter is still pending there.
Following it, the firm moved the Supreme Court today.