“Micro-Management”: Constitutional and Policy Concerns Arising from India’s Microfinance Institutions (Development and Regulation) Bill

Becker, Ashley | January 1, 2013

At the end of 2010, India possessed the largest, most concentrated microfinance industry in the world. Initially, Indian microfinance operations were funded primarily by the state or charitable donations, but the industry has grown to be largely dominated by the private sector. As this shift occurred, the industry became quite profitable, and in the wake of its success, faced a significant amount of backlash. When borrowers in the State of Andhra Pradesh, home to a substantial portion of the households utilizing microcredit in India, complained of excessive rates and predatory collection practices, the State responded by passing a regulation that severely restricted microlending practices. This regulation sharply affected microfinance companies’ profit margins and growth rates, and effectively delegitimized the industry. Following adoption of the regulation, historically high collection rates plummeted and shares in microfinance companies fell to record lows. In July of 2011, India’s central government released a draft bill, entitled “Micro Finance Institutions (Development and Regulation) Bill.” The Bill provides a national regulatory framework for India’s microfinance companies. Furthermore, the Bill preempts existing state regulations, such as the one in Andhra Pradesh. The State of Andhra Pradesh is resisting the Bill, arguing, inter alia, that since India’s Constitution explicitly provides states with the power to regulate the microfinance industry, it represents an unconstitutional usurpation of state power by the federal government. This Comment argues that in the likely event the Bill is passed, Indian courts will hold the adoption of the Bill constitutional, since the federal government does, in fact, have the ability to override relevant state legislation. Adoption of the Bill is likely to provide a solution to the challenges faced by the microfinance industry. By providing certainty, defining boundaries, and providing a government partner, the Bill will both promote development with the currently stagnant microfinance industry and allow it to regain some of the legitimacy it lost in the process of state regulation.