CM writes to FM, RBI Guv on MFIs

A day after the state government issued an ordinance to rein in micro-finance institutions, the Chief Minister, Mr K. Rosaiah, on Saturday wrote to the Union finance minister, Mr Pranab Mukherjee, and the Reserve Bank of India Governor, Mr Duvvuri Subba Rao, seeking an end to the ambiguity on regulating interest rates charged by the MFIs.

In his letter, Mr Rosaiah pointed out “contradictory statements” made by the RBI and the finance department over state governments regulating the MFIs.

“While the RBI Governor had suggested that the state governments were the best agencies to regulate ‘coercive interest rates’, the secretary of finance department has advised us against regulating the interest rates being charged by the MFIs. Considering that the effective interest rates being charged by the MFIs are ranging from 36 to 54 per cent, there seems to be an urgent need to address this issue,” Mr Rosaiah wrote.

He urged Mr Mukherjee and Mr Rao to issue a clarification on whether the state government had the power to regulate the interest rates charged by MFIs or not.

Mr Rao, who responded to the letter, spoke to the CM over phone and clarified that the RBI was in the process of drafting guidelines on regulating the MFIs.

He told Mr Rosaiah that the RBI had already constituted a sub-committee to prepare the guidelines.

Mr Rosaiah also pointed out that since all MFIs were effectively engaged in money-lending activities and since regulation of money lending activities fell in the state list, the government was of the firm opinion that it could regulate the interest rates on its own.

The CM also reminded Mr Rao of his earlier letter sent on May 5 this year on the issue. “You have admitted in your reply dated July 19, 2010 that the MFIs were resorting to malpractice and that the RBI has commissioned a study by SIDBI on micro-financing. In the meantime, we have witnessed a spate of suicides by the poor, unable to bear the coercion unleashed by the MFIs’ recovery agents. To overcome this, we have issued an Ordinance to check unethical practices of MFIs,” Mr Rosaiah said.

He urged the RBI to issue clear guidelines clarifying about the appropriate agency for regulation of interest rates.