HYDERABAD, India — Legislators in the Indian state of Andhra Pradesh were due Tuesday to debate a bill to regulate microfinance companies, as small loans to the poor come under increasing scrutiny.
Legislation before the assembly in the southern state, hub of Indian microcredit, would set new rules curbing aggressive debt collection and steep interest rates that have provoked a backlash against the loan system.
However, critics say the new rules could ruin an industry that was originally invented by Nobel Peace Prize winner Muhammad Yunus and provides crucial credit for millions of poor Indians.
"The bill will make it impossible for microlenders to operate in the state and effectively put us out of business there," Vijay Mahajan, head of the industry body Microfinance Institutions Network, or MFIN, said.
He said collections had already tumbled below 10% in the state, as farmers and villagers refused to repay loans.
The microfinance sector was until recently hailed as a savior of India's poor for providing loans averaging $250 to millions of borrowers — often small entrepreneurs — unable to get credit from mainstream banks.
However, surging profits, accusations of heavy-handed debt collection leading to suicides, and high interest rates have led to claims that microcredit companies have become greedy moneylenders.
The new bill permits loans to be collected only at local government centers rather than at homes, which MFIN says would make it much tougher for borrowers to repay money.
It also only allows lenders to make collections once a month instead of the weekly cycle common across India.
The legislators were set to debate the bill late Tuesday.
Andhra Pradesh moved to rein in microfinance firms after claims in October that high interest rates and arm-twisting debt collectors had caused 85 suicides.