Special Report: A Detailed overview of Microfinance Institutions Network (MFIN)

By Jesselyn Ng,

Microfinance Focus, April 21, 2010: Microfinance Institutions Network (MFIN) is a self-regulated network organization created by 35 NBFC –Microfinance institutions in India, who share the common interest of protecting and building the integrity of the sector. This was in response to the attack that the sector has been subjected to regarding several controversies such as multiple lending and lack of transparency by MFIs. MFIN believes that by coming together as a body, they will be able to more significantly support the Government’s initiative of promoting financial inclusion on a transparent and sustainable basis.

A Centre meeting in Progress

Being a relatively small industry, there have been concerns regarding the possibility of a clash of conflict between MFIN and Sa-Dhan, a lobby group of 300 members that includes not just MFIs but NGOs and people doing capacity-building and research as well. However, such concerns have been duly dismissed by Vijay Mahajan, who sees MFIN as a subset of Sa-Dhan, and represents a select group of organizations, namely NBFC-MFIs. Setting up an independent SRO was necessary, because Sa-Dhan functions more as a conferencing and networking forum and such an arrangement was insufficient to adequately represent and regulate NBFC-MFIs.

MFIN is presided by Vijay Mahajan, who is also the Chairman of Hyderabad-based BASIX. MFIN consists of 35 NBFC-MFIs in India, which account for more than 80% of the Indian market. All of the top 10 MFIs are members, and MFIN also has as on its board prominent leaders of the industry such as Suresh Gurumani, CEO, SKS Microfinance; Chandrasekar Ghosh, CEO, Bandhan; Rekam Jayasurya, CEO, Asmitha; Shubhankar Sen Gupta, CEO, Arohan; Ajay Verma, MD & CEO , Sahayata Microfinance; H P Singh, CMD, Satin Creditcare Network; Samit Ghosh, CEO, Ujjivan; and P N Vasudevan, MD, Equitas Microfinance.

One of the first tasks taken up by MFIN since its formation was to conduct a study with Microfinance Transparency (MFTransparency), an international initiative by Chuck Waterfield, who is himself an active promoter of transparency in microfinance. The study also recommended steps that can be taken to improve transparency in the sector. The next agenda on the list was to invest in Alpha Micro Finance Consultants Private Limited, whose role is that of a special-purpose vehicle (SPV). In early March, it invested Rs 2 crore in creating a credit bureau that specially serves to improve credit risk management within the sector and ensure that multiple borrowing and over-indebtedness is checked. Another aim of Alpha is to eventually be appointed as one of the registrars by the Unique Identification Authority of India (UIDAI) and to help with 100 million registrations under the Government of India programme through identification of its clients and their family members.

This makes the drawing up of the Code of Conduct the most important task undertaken by MFIN so far. The Code was formally adopted on 2nd and 3rd March during an MFIN meeting in Hyderabad, and officially launched to the media on 9th March. It plays a central role in regulating the practices and promoting the integrity of the NBFC-MFIs.

As the Reserve Bank of India (RBI) serves as the regulator of all MFIN members, they are already require to comply with certain rules and regulations laid down by the RBI. The Code of Conduct further ensures that all MFIN members abide by these rules both “in letter and in spirit”, on top of a few other regulatory measures. The issues covered by the Code of Conduct include transparency in fair practices

with borrowers, multiple lending and lending limits, data and incident sharing, staff recruitment, whistle-blowing, enforcement mechanism and the Ombudsperson mechanism.

To protect the rights of the borrowers, the Code insists on clear communication of a minimum list of charges to them, such as the fine print of the loan agreement and the declining rate of interest, via one of their stipulated means. It is also adamant that the nature and amount of charges be covered in the clause to ensure transparency on the part of the MFI. The Code also covers methods for recovery of payment that are in keeping with RBI’s guidelines.

Regarding multiple lending and lending limits per borrower, the Code states that a person should be allowed loans from a maximum of 3 MFIs, and a cap of Rs 50,000 on the total loan at any given point of time. Such a specific regulation requires for a systematic database which can be accessed and contributed to by all members, and regulated by Credit Bureaus CIBIL and High Mark. It is a logistically daunting task, but MFIN has ensured that all data contributed by the MFIs to the Credit Bureaus will be consolidated and standardized by an IT Firm appointed by Alpha.

Regulations regarding the recruitment of staff by MFIs have also been laid down. These regulations have been put in place to ensure that the MFIs and its staff are of the highest integrity, and to reduce complications in relations between MFIs, especially when it is essential that all MFIs work together for the protection of the integrity of the sector.

To encourage responsible practices in microfinance, a whistle-blowing policy has been drawn up that allows anyone, whether borrower or regulator, to call attention to any evidence of a breach of the code. The complaints will go directly to the Code of Conduct Enforcement Committee (CCEC), which consists of the board-approved members Mr Srinivasan of Janalakshmi Financial Services (Bangalore), Mr Ajit Kumar Maity of Village Financial Services Ltd (Kolkata), and Mr Govind Singh of Utkarsh Micro Finance Private Limited (Varanasi). Once a complaint is received, the CCEC will decide whether steps need to be taken. If so, a field investigation will first be conducted by the Secretariat of the Association within an agreed time frame. The field investigation report will be the basis upon which further action is decided, as per the discernment of the CCEC. The findings of the CCEC will be brought before the MFIN board, who will take action if an offence is judged to be committed. Reprimands will be the mildest form of action, following which a letter will be written to the offending MFI, informing it of its breach of the Code. If the warnings are ignored, letters will be written to its stakeholders – first the lenders, then the equity investors, and even the regulators. Following incessant inaction, the board of the MFI, or even specific members of its board, will be informed, that they may take action to keep the MFI in line. If MFIN’s warnings are still being ignored, the offence of the MFI will be made publicly known to the microfinance community, by means of the press. Meanwhile, the MFI’s membership with MFI will be suspended, or even terminated in extreme cases.

The decisions of the CCEC will be further subjected to a neutral agent, an appointed Ombudsperson. He will deal with appeals against the decisions of the CCEC and terminations of membership with MFIN.

With the formalization of the Code of Conduct, Vijay Mahajan tells Microfinance Focus of his hopes that MFIN will become “the engine of inclusive growth in India,” and emphasizes the need for unity within the sector.

MFIN is supported by Omidyar Network, a philanthropic investment firm, and the International Finance Corporation (IFC), a member of the World Bank Group. Omidyar Network funds MFIN in support of its efforts. IFC provides advisory services and technical consultancy to Alpha in its bid to make credit bureau services available to the MFI sector.

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