An Andhra Pradesh law, said to be the root cause of the collapse of microfinance in India and the state in particular, has no jurisdiction over microfinance institutions registered as Non-Banking Financial Company (NBFC), the RBI has told the AP High Court recently.

RBI said the Andhra Pradesh Micro-Finance Institution (Regulation of Moneylending) Act 2010 has jurisdiction only on MFIs which are not NBFCs and not registered with it.

AP Microfinance Ordinance was implemented on October 15, 2010 and subsequently made into an Act in the wake of a spate of suicides by the borrowers allegedly due to the coercive recovery practices by the MFI agents.

AP accounted for nearly 30 per cent of the total Microfinance business which was pegged at Rs 30,000 crore in the country in 2010.

"NBFCs being regulated simultaneously by RBI and State Government will result in dual regulation thereby adversely affecting the functioning of the NBFC-MFIs and the interest of the public," RBI said in an affidavit filed in the court.

This was in response to a writ petition filed by some MFIs questioning the legal validity of AP MFI Act.

"In case of NBFCs the RBI has exclusive power to regulate and supervise them. The provisions of the impugned Act are ultra virus the constitution of India so far as it deals with NBFCs," it added.

The MFI Act mandates prior approval of the state government authorities for every loan application of borrower.

The Act also changed the MFIs collection cycle from weekly to monthly at a designated place.

Fresh disbursals in the State have come to a standstill with the stringent norms set by the State Government.

The State Government has the power to cancel the license of the MFI in case of any violation of the rules of the Act.

"Since the MFIs which are not registered under the impugned Act (AP MFI Act), cannot recover the loans granted by them, it would adversely affect the financial conditions of RBI regulated NBFC MFIs", the affidavit said.

"It is submitted that such a situation is not warranted. It not only affect the interest of the NFCs, but could also have cascading effect on the banks and other institutions from which the NBFC MFIs might have borrowed money for carrying on its MFI business," the RBI said.

Vijay Mahajan, MFIN President, had earlier said MFIs were not able to collect their dues from borrowers to the tune of Rs 7000 crore since November 2010 in Andhra Pradesh after the MFI Act was promulgated

SKS Microfinance, India's only listed micro lender earlier in June said virtually no disbursals are happening in Andhra Pradesh after the AP MFI Ordinance/Act was promulgated in October 2010.

SKS brought down the residual Andhra Pradesh exposure (Net) to Rs 236 crore from a high of Rs 1,491 crore in October 2010 by writing off Rs. 272 crore in Q4-FY12 and about Rs 900 crore in the earlier quarters.

SKS further had said it had incurred a loss of Rs 1,360 crore during the year ending March 2012 primarily on account of the Andhra Pradesh situation.

The RBI in its affidavit said the apex bank has enough provisions to supervise the NBFCs activities such as interest rate, registration, licensing and repayment model.