Self Regulation Organisation
Since inception MFIN has been constituted as a Self- Regulatory Organization and its Bye-laws and Memorandum of Association (MoA) has its foremost objectives to:
- Act as the Self-regulatory organization for the microfinance sector and to regulate the business of microfinance as carried out by its members.
- Create, develop, distribute and publicise, sound development, operational and financial practices and minimum thresholds of performance for its members and to encourage other persons engage in the microfinance sector to adhere to and comply with such practices and thresholds.
Post Andhra Pradesh crisis in 2010, the high-level committee known as Malegam Committee was formed by the Reserve Bank of India (RBI) thoroughly examine the issues of the microfinance sector. This Committee advocated the role of industry association as Self-Regulatory Organization (SRO) in the compliance system of NBFC-MFIs1.
Most of recommendations of the Malegam Committee were taken on board by the RBI in Dec 2011 as2 RBI introduced a new category of NBFCs, named NBFC-MFIs, with detailed Directions on gamut of things including definition of NBFC-MFIs, prudential norms, pricing of credit and customer protection measures including multiple-lending and over-lending. The Directions also stated that separate guidelines will be issued on the role of industry associations in the overall monitoring of the microfinance sector. Detailed guidelines for the recognition as SRO came in Nov 20133, following which MFIN became the first industry association to be accorded the SRO recognition by the RBI in June 2014.
As an SRO of the RBI regulated NBFC-MFIs, MFIN has been instrumental supporting and implementing an effective framework for responsible lending and client protection for the industry. In the changing supply-side landscape with Financial Institutions (FIs) other than NBFC-MFIs providing micro-credit, MFIN has broadened its ambit to support other FIs to adhere to industry Code of Conduct (CoC) and Directives/Advisories to ensure responsible lending.
An SRO, the priority is to ensure interest and welfare of the clients as they engage with the NBFC-MFIs. As per the mandate given by the RBI, MFIN’s self-regulation work is broadly structured around 5 aspects as under. The details on each work mandate is given as below:
- Under its SRO mandate, MFIN formulates the Industry Code of Conduct (CoC) and continuously set-up industry standards across different areas to ensure responsible lending in an evolving industry. Adherence to Industry CoC and MFIN Standards (Directions and Advisories) is mandatory for the membership of membership of MFIN.
In exercising its role as a self-regulator for the industry, SRO ensures that NBFC-MFIs comply with RBI Directions, Fair Practices Code, Industry CoC and other MFIN Directives/Advisories. For this purpose, MFIN has a comprehensive surveillance mechanism based on information/data from member NBFC-MFIs, peer monitoring, field level investigations through third party agencies/own staff and Credit Bureaus among others. Cases of non-compliances are addressed by an Enforcement Committee. Some of the key surveillance tools used by SRO are as under:
Industry Compliance Index
The Industry Compliance Index is a bi-annual self-assessment tool which all member NBFC-MFIs use to draw up a compliance and performance score card focusing on client interface. It collectively assesses members’ business principles, policies and practices. It is a tool to help individual NBFC-MFIs to systematically measure, manage and integrate responsible business practices through gap analysis, benchmarking and tracking.
Based on the requirement, SRO captures periodic and adhoc data from member NBFC-MFIs. For example, data is collected on insurance claim settlements and client grievance redressal (client complaints to NBFC-MFIs) to monitor that NBFC-MFIs have robust framework to deal with them.
MFIN takes extensive data from the Credit Bureau to understand emerging risks and non-compliances such as over/multiple lending, KYC seeding etc.
Third Party Evaluation
MFIN has put in place a comprehensive external evaluation mechanism which validates the members compliance with various RBI Directions and Industry CoC etc. MFIN has empanelled independent agencies to conduct Third Party Evaluations.
- At an industry level, there is a 3-layered Grievance Framework as under:
- Level 1: MFI is the first level where client can approach for the resolution of complaint. If the client is not satisfied with the resolution provided, she can approach MFIN.
- Level 2: At the second level is MFIN Client Helpline, which receives the client complaints un-resolved by the NBFC-MFI to her satisfaction.
Level 3: As final authority, client can call to RBI (DNBS) for the resolution of complaint.
Following its SRO mandate from the RBI for Industry-level Client Grievance Redressal, MFIN launched a Toll-Free Client Grievance Redressal Helpline 18002700317 in July 2015. The objective of the grievance resolution mechanism is to provide an escalation mechanism to the clients to address the grievances unresolved by NBFC-MFIs and to understand systemic client grievance issues emerging and address them.
In last couple of years, there has been a gradual progress. There is higher degree of awareness among clients and NBFC-MFIs about the mechanism leading to higher complaint volume. There is also a better capacity to handle/address the complaints and analyse them to identity the systemic client grievance issue with an area or NBFC-MFI.
In the event of clients reaching out to MFIN, the SRO facilitates communication of client complaints to the concerned NBFC-MFI and tracks its resolution. In case the case is not resolved to the satisfaction of the client within the stipulated Turn Around Time (TAT), MFIN’s Enforcement Committee steps in to resolve the issue and directs the concerned NBFC-MFI to resolve the issue. Lack of compliance can lead to the NBFC-MFI being penalised by the Enforcement Committee of MFIN.
Financial education is the most critical component of client protection as it provides client information, understanding and knowledge to make informed financial decisions. SRO has been taking several initiatives across using different means towards this as under:
Awareness of Credit Bureaus: Collateral has been developed for the customers to educate them about credit bureaus and how this impacts their ability to access credit from formal financial institutions. Under this project, training of trainers (ToT) were also conducted for staff of member NBFC-MFIs staff so that customer training component for credit bureaus can be integrated with their training program for the customers.
Research, Development and Knowledge
Focusing on SRO aspect, research/development work is undertaken to understand systemic industry level issues/needs, capture good practices and ways to address them. In recent past, research have been undertaken on credit bureau ecosystem, grievance redressal framework, multiple lending, geographic concentration etc. Training and workshops are also organized for the NBFC-MFIs on various aspects of compliances and customer engagement.
To guide, steer, oversee and support the SRO work, there is strong governance framework through two committees as under:
Enforcement Committee (EC): The Enforcement Committee is constituted for proper enforcement of the Code of Conduct and exercising oversight adherence to regulatory norms prescribed by the RBI / Government / any other regulatory authority by the member NBFC-MFIs. The role of the EC is to primarily handle issues of non-compliances and grievances arising from clients requiring redressal. The EC can take actions such as a. Issue Warning; b. Issue Censure; c. Levy fines for violations by NBFC-MFIs.
There are 3 independent members and 2 industry members in the EC. The Compliance Officer of MFIN is the non-voting Ex-Officio Member of the EC and a member of the SRO staff is the member secretary to the EC.
Self-Regulatory Organization committee (SROC): The SROC is the appellate body for EC decisions. The SROC can recommend suspension, expulsion and termination of membership to the Board with a speaking order in writing. In addition, SROC provides oversight and directions to SRO functions.
The SROC comprises of 5 (five) Members of which 2 (two) are from amongst the Elected Members of the Board and 2 (two) from Independent Members on the Board. The remaining 1 (one) member of the SROC is an independent person of eminence who is familiar with the financial services industry, whose appointment is approved by the Board. In addition, the Chairperson of the Enforcement Committee (EC) is the member to the SROC. MFIN, CEO is the non-voting Ex-Officio Member of the SROC and the Compliance Officer of MFIN acts as a Member Secretary of the SROC.
Reporting to the RBI
- SRO does a very detailed quarterly reporting to the RBI on the industry including operational and financial trends, customer complaints, non-compliance, action taken and emerging issues among other things.