RBI Accords SRO Status to MFIN, Client Protection in India is Strengthened

> Posted by Hema Bansal and Pallavi Sen, the Smart Campaign and MFIN
[getty src=”186180761?et=XZ4z7486QYVB0rGJgiFO4g&sig=_YKhelFm4fwvYiopfWWXnUrwwOMG2HUgArB-0h_KVjE=” width=”620″ height=”464.48″]
On June 16th the Microfinance Institutions Network (MFIN) was officially recognized as the Self Regulatory Organization (SRO) for non-bank financial company (NBFC) microfinance institutions in India. With this, MFIN not only became the first network to attain such recognition in India, but also in Asia and perhaps in the world.

An SRO is an organization that has been authorized by a statutory regulator or a government agency to exercise control and regulation on its behalf over certain aspects of an industry. Established in 2009, MFIN is an association of NBFC-MFIs acting as their primary representative body. As an SRO, MFIN will essentially support the RBI in ensuring compliance to regulatory prescriptions and the Industry Code of Conduct.

Subsequent to the Andhra Pradesh crisis, the RBI had instituted a subcommittee of the Central Board of the Reserve Bank under the chairmanship of Shri Y. H. Malegam to study issues and concerns in the microfinance sector in India. The committee submitted its report in January 2011, thereby providing concrete recommendations and guidelines for the creation and recognition of microfinance NBFCs in India. Except for setting in place an SRO, all the other recommendations of the committee were implemented by the RBI in 2012. These other guidelines included establishing a credit bureau, the Guidelines on Fair Practices Code for NBFCs, and additional guidelines on loan size, target clientele, interest rates, transparency, collection practices, and multiple lending. With MFIN recognized as an SRO, the RBI is now implementing the last remaining Malegam Committee recommendation.

As MFIN assumes the industry SRO role, it will not only be tasked with monitoring the sector on the RBI issued guidelines, it will also be required to take up research and training responsibilities and handle submission of MFI financials to the RBI. The SRO will also act as a sounding board for the RBI, providing policy inputs to the central bank, and as a vehicle to conduct investigations into areas of concern identified by the RBI and report violations. The framework and processes for effectively performing all these functions are being put in place.

Since its inception in 2009 MFIN has been acting as the unofficial SRO for the industry. The formal recognition by the RBI converts a de-facto reality to a de-jure position and supports a healthy balance between the regulatory and developmental needs of the industry. MFIN has played a key role over the past few years in implementing the Industry Code of Conduct and in developing a full scale credit bureau ecosystem for the industry.

MFIN’s current membership consists of 48 leading NBFC–MFIs in the country which in aggregate constitute over 80 percent of India’s microfinance industry in terms of client outreach. In effect, the SRO role of MFIN is an industry supported “public good,” focused on promoting responsible lending and client protection.

Commenting on the SRO framework, Alok Prasad, CEO of MFIN said, “In essence, ours is a supportive role. RBI as the apex financial services regulator is responsible for regulating the NBFC-MFIs. MFIN will be acting on behalf of the RBI and performing a given role, within well-defined parameters. An SRO framework is not only a leap of faith on the part of the RBI but practically an ‘experiment’ in regulatory architecture.”

Stating that MFIN’s SRO role is primarily focused on client protection and grievance redressal, Prasad said, “The surveillance exercised over members will substantially aid the process of customer empowerment.”

The Smart Campaign has been a long-standing partner of MFIN and has supported the network to ensure that the Client Protection Principles, which are integral to the Industry Code of Conduct, are adopted uniformly across the industry. The Campaign has also trained staff and leaders of MFIs in India and has carried out several Smart Assessments to help institutions upgrade their practices as needed and meet Smart Certification standards. In 2013, Indian NBFC-MFIs (and MFIN members) Ujjivan, Grameen Koota, and Swadhaar achieved Smart Certification. Going forward, the Campaign is committed to supporting MFIN in its new role. It will also explore specific areas wherein it can contribute its global knowledge and experience to enhance MFIN’s effectiveness as SRO.

Image credit: Bloomberg / Bloomberg / Getty Images

Have you read?

New RBI Governor Points to Inclusive Development for India

The Suitability Approach to Client Protection: Comments on the Mor Committee Report

RBI Committee Sets Goal of Universal Access to Financial Services by Jan. 1, 2016