Clipped from: https://www.thehindubusinessline.com/opinion/editorial/micro-realities/article69531104.ece
TN’s crackdown on microfinance is ill-conceived
MFIs play a key role in financial inclusion | Photo Credit: AJIJCHAN
The Tamil Nadu Assembly earlier this week passed the Money Lending Entities (Prevention of Coercive Actions) Act, which is aimed at preventing coercive recovery activities in microfinance lending — defined broadly as unsecured loans of less than ₹3 lakh. The Act spells out harsh punishment, including imprisonment, for excesses. The law, like the Karnataka Micro Loan and Small Loan (Prevention of Coercive Actions) Act passed in March, is an ill-considered move.
While the two laws are supposedly meant to apply only to the entities not regulated by the Reserve Bank of India (estimated to make up less than 5 per cent of the market), their impact will reverberate across the MFI universe. The TN law seems to debar intimidation, property attachment, using third party agents, persistent follow ups and late night calls. While outright intimidation surely cannot be justified, even a routine field check may now go down as an act of coercion. This could pose a problem for bonafide, regulated entities. The RBI’s regulations on microfinance, spelt out in the Fair Practices Code (July 2015) and the Regulatory Framework for Microfinance Loans (July 2022), are comprehensive in the protection of borrower rights. In the event of coercive practices, States can take specific action. The two self regulatory organisations for this space, Microfinance Institutions Network and Sa-Dhan, can work in tandem with the RBI and the States to deal with these excesses.
But the enactment of a TN-type law ‘politicises’ the MFI space, where harassment of businesses can become the norm. Clearly, the lessons from the 2011 microfinance crackdown in undivided Andhra Pradesh have not been learnt —namely, that cracking down heavily on microfinance to deal with its distortions will drive entities out of this space altogether, driving the poor into the clutches of the exploitative traditional moneylender.
Yet, there can be no denying the irregularities in the MFI sector. A number of MFIs pursue aggressive lending strategies in the pursuit of growth, being goaded by their foreign debt and equity financiers. It is just as well that Sa-Dhan has promised to enforce from June 1, a cap on processing fees, limiting top up loans (the RBI July 2022 rules say that loan repayments should not exceed 50 per cent of monthly household income) and a maximum of three lenders serving a household. The Inclusive Finance India Report 2024 observes that high growth in MFIs masks rising proportions of portfolio at risk as well as multiple loans, while making the interesting observation that the self-help group model (largely outside RBI’s ambit) has taken a hit with the rise in individualised digital finance. SHGs were known for their credit discipline. The SROs should move with social and technology driven changes in the MFI space. They could do with enforcement powers. MFIs’ potential as an instrument of financial inclusion, now catering to 9 per cent of the adult population, should not be underestimated.
Published on May 4, 2025
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