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After the 2010 Andhra Pradesh crisis shook the microfinance sector, a code of conduct for NBFC-MFIs was jointly developed by MFIN and Sa-Dhan in 2011, drawing from RBI’s Fair Practices Code. The Small Industries Development Bank of India (SIDBI), a major lender to NBFC-MFIs, commissioned external evaluation and rating agencies to conduct Code of Conduct Assessments (COCA) for NBFC-MFIs.
Asked about violations of the code of conduct by NBFC-MFIs, Professor Alok Misra, chair of MFIN’s self-regulatory organisation committee, stated, “[NBFC-MFIs] comply with all regulations. The sector is not just well-regulated, but over-regulated. Nowhere in the world is accountability and regulation as prescriptive, strict and enforced as microfinance in India.”
In December 2011, Ramesh Arunachalam, who has authored several books on microfinance and worked extensively in the sector, questioned the liberal granting of points in the COCAs. He worries that regulators check whether a code exists on paper, instead of checking its actual implementation.
“Just because elaborate COCAs happen, there is no guarantee of implementation on the ground. Criticism of the sector is never accepted. Stakeholders, including some investors and lenders, want NBFC-MFIs to disburse huge amounts of money to clients. Numbers are inflated, and the broker agent model still prevails in MFI operations,” Arunachalam said, pointing to the recent failure of credit rating agencies to anticipate defaults worth millions by NBFCs.
According to the RBI, NBFC-MFIs have to be members of at least one credit rating bureau. Credit bureaus consolidate the data of microfinance borrowers, which is used by NBFC-MFIs to assess a client’s existing loan exposure and their creditworthiness. The RBI has criticised rating agencies over their inability to properly assess credit risk.
In 2014, the consulting firm Microsave consolidated the COCAs of 50 MFIs. Their ensuing report said that MFIs performed well in orienting staff on the code of conduct, as well as in transparency and fairness. However, many MFIs serviced clients with incomes above the prescribed limits. A small percentage of MFIs accepted collateral, violating collateral-free lending regulations.
Only 54 percent of MFIs had boards in which over one-third of the members were independent. Both the report of the 2011 RBI Malegam committee, which was formed to probe and make recommendations for the microfinance sector after the Andhra Pradesh crisis of 2010 and the revised code of conduct developed by MFIN and Sa-Dhan, stipulate the need for independent directors on the boards of NBFC-MFIs. In fact, the revised code of conduct states that MFIs must endeavour to have independent directors make up one-third of their governing board.
Global Ground Media also uncovered Code of Conduct Assessments that list several instances of coercive recovery techniques, overindebtedness and even the collection of repayment after the spouse had died.
These recent COCAs, created from 2016 to 2018 by rating and evaluation agencies, show that many concerns regarding MFIs which existed before the 2010 crisis are still warranted.
- Arohan’s 2016 COCA by ICRA Management Consulting Services Limited showed that in three cases, loan instalments were collected despite the death of the spouse. Arohan’s 2017 COCA report by ICRA noted that it did not provide a sanction letter and a copy of the loan agreement to borrowers.
- Uttrayan’s 2016 COCA conducted by Access Assist observed that its board recommended persuasion and pressure tactics on defaulting groups and members. GDFPL’s 2016 COCA by M2i Consulting asked it to avoid unauthorised agents in finding clients.
- SV Creditline’s 2017 COCA by CARE found instances where borrowers’ income was higher than the stipulated limits.
- Annapurna Microfinance’s 2017 COCA by ICRA said it lent to borrowers who had higher indebtedness levels than permitted.
- In March 2017, Prayas did not have a policy on compliance with the code of conduct, according to its COCA conducted by CARE.
- Nightingale Finvest Private Limited’s 2015 report by M2i Consulting noted low awareness among clients of interest rates.
The COCAs of several MFIs also stated that they lacked satisfactory client redressal mechanisms.
- For example, while Arohan’s 2017 COCA said it had a fairly structured grievance redressal mechanism, borrower awareness of the mechanism was low.
- Similarly, Annapurna’s 2017 COCA showed that client awareness levels on the grievance redressal mechanism of industry associations were low.
- Chanura’s 2015 COCA by M2i Consulting noted that while it had a grievance redressal committee, there was no mechanism to capture client feedback reported to the branch staff.
- GDFPL’s 2016 COCA revealed that it did not have defined step-by-step procedures to resolve complaints.
In addition to industry reports and governmental committees, recent Code of Conduct Assessments also mention prevailing issues long after the 2010 crisis should have brought about change.
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Article by Urvashi Sarkar.
Editing by Mike Tatarski and Anrike Visser.
Research by Peter Allen Clark.
Illustrations by Imad Gebrayel.
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