Progress toward Improved Client Protection in the Indian Microfinance Sector

>Posted by Center Staff
One cannot discuss the Indian microfinance industry without considering the crisis in Andhra Pradesh, but the sector has undergone dramatic changes since the incidents two years ago. Hema Bansal of the Smart Campaign staff recently attended the Financial Inclusion Conference 2012 in New Delhi to talk about how changes in the Indian microfinance sector have affected consumer protection. Here are highlights from her talk.
While acknowledging that numerous obstacles remain for the sector as a whole, Ms. Bansal praised specific improvements in the client protection environment: the Reserve Bank of India provision of a framework for regulating client protection; the development by industry associations of an industry Code of Conduct; and the influence of social investment funds.
One area where improvement can be seen is pricing transparency. Just two years ago, transparency levels were purely market driven and MFIs were hesitant to communicate their pricing. Today, regulations and social investors are driving higher transparency standards. For the first time, microfinance institutions in India are introducing an element of competition by communicating their loan pricing, which makes it easier for clients to select the correct loan.

Progress is also apparent in the uptake of the industry Code of Conduct. Sa-Dhan and MFIN are leading the industry toward the implementation of the Code and moving the sector toward better policies and practices. More specifically, Sa-Dhan has developed a tool for monitoring MFIs that incorporates the global standards of client protection developed through the Smart Campaign, and MFIN, with help from the Campaign, is engaging with its  partners to assist with Code of Conduct trainings and monitoring to promote better standards of client protection.
As the Indian microfinance market matures, investors are increasingly realizing the credit risk associated with client over-indebtedness. In the last year the Smart Campaign trained social investment funds active in India, including IFC, Oikocredit, Maanaveeya, SIDBI, FMO, Incofin, Caspian, and IFMR Capital, all of which have or are working towards integrating client protection assessment into their due diligence and reporting.
Finally, on behalf of the Campaign, Ms. Bansal promised that the Campaign will continue to engage with industry stakeholders including investors, consulting companies like EDA and Microsave, and networks to ensure that the industry actively upholds and implements the Client Protection Principles.
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Have you read?
Eight New Observations on the Aftermath of the Indian Microfinance Crisis
Consequences of Over-Indebtedness: Lessons from India
The Lessons of Andhra Pradesh