The Bangalore-based Center for Financial Inclusion (CFI), a think-tank set up by one of the leaders in the global microfinance industry, Accion International, is advocating a code for protecting microfinance customers. CFI's client protection code is based on a commercial model of microfinance that upholds the interests of the economically weaker clients.
Elisabeth Rhyne, MD, CFI, shares her views with FE's Gireesh Chandra Prasad and Subhash Narayan on the global effort on client protection termed as the ‘smart campaign’.
Why do we need a code for client protection in microfinance?
One of the starting points of the problems facing the industry was its rapid growth, leading to slippage in some of the standards. When you grow very fast, you can’t keep training staff fast enough to maintain the level of quality needed.
Smart campaign is about keeping the standard really high so that clients are protected. It focuses on seven client protection principles, such as transparency, responsible pricing, appropriate product design, delivery and collections practices, prevention of over-indebtedness, privacy of client data, fair and respectful treatment of clients and complaint resolution. It is a sort of a consumer bill of rights for the industry. It has 2,500 endorsers globally, including almost all of the largest microfinance institutions in the world.
What do you think would be the right regulatory model for a successful microfinance industry in India?
A key element of successful microfinance industry is to legislate client protection in a way that is not punitive to the industry. If you protect the client so much by saying that the industry has to charge very low interest rates, then it cannot cover its costs and, hence, cannot survive. It is really important for India to allow multiple models to flourish.
We have the non-profit MFIs, the business-like ones, the NBFCs and the co-operatives. I would also like to see India allowing MFIs to collect savings. I know it is in the new Bill. Mere borrowing could result in over-indebtedness. If an institution could offer both loans and accept savings, then it is better placed to help the client by way of a more balanced set of financial offering. The RBI has traditionally been very unwilling to allow deposit mobilisation by MFIs in the past. But I am starting to hear that it might be changing, which is a good move.
What progress has CFI made towards client protection in India?
In India, CFI has partnered with stakeholders like industry association Micro Finance Institutions Network (MFIN), investors IFC and Sidbi, non-banking finance companies and non-profit organisations like Sa-Dhan to create the Responsible Finance forum, which brings together all the players in the industry to work on client protection. They have prepared a code of conduct with an Indian face, essentially incorporating the seven client protection principles from the smart campaign.
What is interesting and is different in India is that the regulators are asking the associations to take the lead in implementing it and doing some self regulation around these principles. It has not happened in most other countries.
Do you think state governments may be better placed in ensuring better client protection?
I would not say so. State governments actions are often politically motivated rather than being governed by understanding of the financial sector. One of the things happening in the microfinance Bill is that it is giving RBI the clear mandate to be the sole regulator. I agree with that because the RBI understands the needs of both the clients and the financial institutions.
The problem with a politically motivated structure is that they just understand the needs of the clients, but forget the needs of the institution. So, they shoot themselves in the foot by killing the microfinance industry in the name of protecting its clients.
In India, there is no code to take care of personal bankruptcy. Do you think that is needed for the growth of the microfinance industry?
If you look at the track record of the MF industry, they have done a good job in recovering their loans as long as there is no political interference by way of statements claiming that clients do not have repay their loans.
Probably, bankruptcy is too complicated to be relevant for clients at the level of microfinance. Since the loans are too small, the costs of going through bankruptcy proceedings would be outrageous. And the assets they have to liquidate are non-existent anyways.
But one of the other pieces of this picture is building a credit bureau. This is necessary as lenders currently do not know about the client’s prior credit history before extending loans. This had contributed to the problem in Andhra Pradesh. We have recently done a worldwide survey of microfinance investors and their primary demand was for a credit bureau. It is going to take a while for it to work in India as it has to build that coverage.
That is also one of the reasons why the new unique identification number programme in India is very exciting.
The global liquidity pressure has affected microfinance institutions. As you know, MFIs find it hard to get funds from banks and financial institutions in India. Is getting funds a major problem for MFI industry?
Actually, liquidity pressure is not so much of a problem in the rest of the world. One thing I can say is that international investors are strongly backing the smart campaign because there are funds such as avishkar, bellwether set up to invest in MF institutions. They attract investments from investors who are not specialists in microfinance, but are keen to invest in the sector because of its social values and contribution. So, they want to be assured of strong client protection.
Is there a rating to assess the performance of MFIs in client protection?
Globally, we are about to introduce a certification process where rating agencies will be licensed by the smart campaign to certify whether an MFI meets the client protection standards. That may not happen in India quite as fast as it happens outside India because of the fact that a lot of that demand is from international investors, which are not so prominent in India. In India, it may happen much more through the associations as they have been charged by the regulator to do that kind of monitoring.
Do you foresee a consolidation in the microfinance industry in India ? Do you think larger institutions will be able serve customers better?
I do expect some consolidation in India . I guess there is a role for both big and small institutions. What I look for in an institution is that it should have a range of products, operate commercially with a strong social orientation and has the stability for raising capital.
The issue with the Indian MFIs is that they are one-product entities and that is not very healthy. I personally would like to see the Indian MFIs develop a variety of products.