Self Regulatory Organizations - Promoting Responsible Lending and Client Protection

Indian Microfinance sector is one of the pioneers in the world where the Central Bank had come up with official recognition of industry associations as Self Regulatory Organizations. It was felt essential, especially after challenges that were there for the sector particularly in the State of Andhra Pradesh.

SROs play a complementary and supportive role to the Reserve Bank in monitoring the sector. The Reserve Bank expects the SROs to function in the interest of all stakeholders especially of the clients and not to act only as an Industry body. Therefore, it is very much essential that SROs function with and promotes a high level of integrity, values, and ethics among its members. In SROs like Sa-Dhan, such aspects are quite evident when one notices the Board composition which includes experts from FWWB, SEWA Bank, SIDBI, Grameen Capital etc. In addition, as recommended by RBI, SROs like Sa-Dhan have been constantly reducing the dependence on membership contribution, to ensure their freedom to act in an independent and impartial manner is not compromised in any way.

SROs role as defined by the Reserve Bank includes Sector surveillance, Grievance redressal, Financial Literacy, Sector data Reporting/Analytics and to investigate into areas as advised by the Reserve Bank.

KPBF was launched in Mar’17, with an aim to provide innovative and efficient microfinance products and services to our customers through a completely cashless and paperless route. One important aspect we have always kept in mind while designing the processes and products is that the customer relationship is the most important factor in microfinance. In a company like ours, which is heavily dependent on technology to differentiate in the service offerings, there is always a chance to focus on technology overcoming the human element. But, being a post-demonetization child, we were able to learn from this mistake committed by few others and ensured that we gave supreme importance to maintain the connection with our customers and employees while building the technology layers.

As industry surveillance is the most important role of an SRO, it is expected that SROs are well equipped especially with the robust use of technology. Sa-Dhan’s SRO team conducts regular field visits to MFI branches and center meetings to ascertain the status of implementation of fair practice code and the industry code of conduct. In order to strengthen field surveillance, recently Sa-Dhan in association with IFC and Smart Campaign has come up with an online monitoring tool which would provide critical information on market saturation, over-indebtedness, and gaps in compliance by MFIs. Globally, in Microfinance, this is one of the unique initiatives to promote responsible lending and client protection.

SROs are expected to have effective grievance redressal mechanisms in place and promote financial literacy among clients on a regular basis. To promote Financial Literacy-cum-Grievance redressal, Sa-Dhan had come up with IVRS based audio clips on various topics of financial literacy and client protection which are played in the local language. IVRS is also used to record the grievances of clients. Regular field level financial literacy programmes for clients are also organized by Sa-Dhan especially on rights and duties of responsible borrowers in the local language.

In addition to clients education, Sa-Dhan also conducts regular Sensitization programmes for field staff of MFIs on RBI Fair practice code, an Industry code of conduct and Risk Management. These programmes are organized on a regular basis in a case study mode. Regular interface meets are also organized by Sa-Dhan to promote sharing of critical information like negative areas, ringleaders etc.

As SROs are expected to regularly submit data and analytics about the sector to the Reserve Bank, SROs like Sa-Dhan come up with Quarterly Sector reports and Annual Bharath Micro Finance Report. These reports act as a great source of information and analytics for the Reserve Banks and member. It is also shared with other stakeholders like Government, Banks etc. 

State Level Microfinance Associations like KAMFI which act as extended arms of SROs also organize regular interface meets for MFIs at the district level and state level. State Associations work closely with Sa-Dhan in order to strengthen responsible lending practices among MFIs. Their role is noteworthy especially in times of local issues that affect microfinance institutions.

To sum up, SROs play a critical role in promoting responsible lending and client protection. They should constantly re-invent and be well prepared to address the challenges of the sector. They should be pro-active, have strong surveillance systems, focus on risk management and governance, act with high integrity, use technology sensibly and scale up initiatives effectively. Initiatives to promote and nurture the culture of responsible lending among MFIs and responsible borrowing among clients are to be taken up regularly. SROs should protect the interest of all stakeholders especially of clients and not only as an industry body or lobby group.

About the Author:

Karthick Ramadas is an alumnus of National Institute of Rural Development. He is presently associated with Sa-Dhan which is an RBI recognized SRO and Industry Association for the Microfinance sector. The opinions expressed are personal and may not be of Sa-Dhan.