The greatest contribution of MFIN in these ten years has been to equally represent both the industry providers on the supply side and the clients on the demand!
While MFIN helped create a responsive ecosystem for the organizations to operate in, it also ensured client protection through responsible business practices.
Finally, lessons and learnings led to a more resilient sector, be it the borrower, lender, or any other stakeholder!
Years of engagement with various industry stakeholders have allowed MFIN to create a responsive ecosystem for microfinance delivery.
The regulator through creation of enabling policies, the regional stakeholders for supporting on ground, credit bureau with its expansive database of customers, the Lenders who stood by the industry to provide liquidity support, or the partnerships MFIN enjoyed across India and abroad, all contributed to this journey of Microfinance.
MFIN’s prime objective is to work closely with the regulator to address the many challenges of the industry and enable it to reach its goal of financial inclusion. Later, owing it being accorded the status of SRO, its responsibility for ensuring responsible business grew manifold.
Some of the key policy involvements of MFIN with the RBI which were historic to the extent of changing the way Microfinance operated in India, have been:
- Inputs to the Malegam Committee in wake of the Andhra Crisis 2010.
- Creation of a new category of NBFC-MFI by the RBI and its guidelines. This was viewed as one of the major “regulatory wins” for the sector with the RBI recognising NBFC-MFI as a separate and distinct category of financial institutions, a turning point for Microfinance.
- Dedicated efforts towards shaping a forward-looking architecture for financial inclusion, MFIN shared its viewpoint on the RBI discussion paper on “Banking Structure in India – The Way Forward” which considered the desirability and practicality of having small, localised banks as preferred vehicles for financial inclusion. it is noteworthy that national financial architecture required the presence of a wide variety of institutional forms to serve the bottom of the pyramid segments.
- In the year 2011-12, MFIN was, for the first time, invited for the pre-Monetary Policy meeting chaired by the Governor, RBI and in annual meetings thereafter.
- MFIN advocated with RBI for differentiated banking licenses with RBI granting ‘in Principle Approval’ to an NBFC-MFI for Universal Banking License.
- MFIN advocated for NBFC-MFIs inclusion as Banking Correspondent.
- The Reserve Bank of India granted ‘in-Principle Approval’ to 8 NBFC-MFIs for Small Finance Bank Licenses which was a significant landmark sectorally. The MFIs had a head start to get these licenses despite 72 contenders in the initial line up.
- The increase in the household income limit for borrowers of NBFC-MFIs from Rs 1 lakh for rural areas and Rs 1.60 lakh for urban/semi urban areas to Rs 1.25 lakh and Rs 2 lakh, respectively was a significant milestone.
- MFIN sought moratorium support, forbearance on asset qualification and continued liquidity support through concerted engagement with various lenders including banks, non-banks and rating agencies, all of which played a crucial role in helping sustain the industry during pandemic Covid 19. Further, the inclusion of NBFC-MFIs by Ministry of Home Affairs in the list of essential service providers based on MFIN’s request paved way for opening of branches with skeletal staff during the lock-down period.
- MFIN had been advocating for activity-based regulations since 2018, resulting in the issuance of a ‘Consultative Document on Regulation of Microfinance’ by the RBI on June 14, 2021. MFIN’s view on the same was sent to the RBI in July 2021. The Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 released on March 14, 2022, incorporated most of the feedback given by MFIN. The new harmonized regulations will usher in a new era for the responsible and sustainable growth of the sector.
Credit Bureau Ecosystem
Credit information network is a critical building block to facilitate low-income customers’ access to credit, ensure credit discipline, address leverage, and mitigate risks. Pre-2010, absence of comprehensive credit information was a key challenge in the development of the sector.
MFIN has been playing a catalytic role in strengthening the credit bureau ecosystem for microfinance customers. As a result, India perhaps has the largest and the most evolved credit bureau infrastructure for microfinance with 3 CICs operating and cumulative database of over 12 Crore customers with more than 45 Crore loans. At present, over 10 Crore loans are updated on a weekly basis and industry is transitioning to daily submission of data. Credit bureau ecosystem is extensively used with multiple use-cases including underwriting, adhering to leverage norms, planning business/risk strategies, monitoring of loans and oversight among other things.
Key contribution of MFIN in this regard are as under:
- Facilitated the formation of the first Credit Bureau focused on low-income markets (CRIF HighMark). Other mainstream Credit Bureaus, such as Equifax and CIBIL also now offer services/products to the microfinance sector. MFIN continues to closely engage with all the credit bureaus by monitoring compliance to credit bureau reporting by its Members, raising awareness and in improving the credit bureau data quality.
- With technical assistance from IFC, worked with the CICs and lenders to define the framework and process for data collection, submission, quality, dispute resolution, reports, governance etc and provided capacity building support to lenders to prepare them for their participation.
- Instituted a Task Force for the Credit Bureau early on to guide and oversee the progress. This Task Force, based on monitoring, specific research and understanding of the emerging issues, regularly revised the standards towards higher benchmarks to meet the market demands. These were also closely monitored and enforced their adherences.
- Raised awareness amongst lenders and customers by regularly developing the necessary collateral and trainings.
- Engaged with the regulator to widen the scope of credit bureaus and necessary changes for robust and comprehensive credit bureau ecosystem such as mandatory use of credit bureau report for lending, on-boarding of data from SHGs, data parity amongst all CICs and a comprehensive Credit Information Report.
- MFIN introduced analytical and data-rich Microfinance reports documenting the performance of the sector and its contribution to the Indian economy. Thesechronicles will play an important role in tracing the evolution of the sector. To see these reports, click here.
Over years, by ensuring Members’ adherence to standards and regulations, MFIN has built credibility for the sector. The responsive ecosystem it has created in this one decade has been a large contributor in the sector’s ability to bounce back after continued crisis, making it increasingly resilient. The investors’ confidence in the sector remains high despite the high-risk nature of microfinance operations. Also, in times when the industry needs liquidity support, MFIN steps-up its engagement with multiple stakeholders, its objective being two-fold:
- Customers – to ensure that micro-credit lenders can meet the increased demand for credit of customers in a responsible manner.
- MFIs – to enable them to tide over crisis.
To maintain a favorable investment climate for the microfinance sector and provide support to MFIs, MFIN
- Has been in constant dialogue with investors and analysts to apprise them about the sector’s growth and development, through its analytical publications and direct interactions.
- Keeps special focus on smaller and medium sized MFIs that are the future of the sector. Several initiatives have been taken for smaller MFIs like facilitating pooling of their assets for securitization, creation of a consortium of lenders that include larger NBFC-MFIs for meeting their critical funding needs, development of an information sharing platform that can be used for showcasing performance and facilitating interacting between MFIs and lenders/investors for funds.
- Has been advocating for availability of funds at lower cost so that loans can be offered at lower rates to microfinance borrowers, especially in crisis. Technical notes have been shared with RBI on this matter using historical data of NBFC-MFIs to show how the existing pricing regulation for NBFC-MFIs is impacting their sustainability and the changes that could be implemented.
- During Covid-19, MFIN engaged with RBI for extending liquidity support to NBFC-MFIs resulting in the announcement of several schemes like TLTRO 2.0, Special Liquidity Facility (SLF) and Additional Special Liquidity Facility (ASLF) which was specifically meant for small sized MFIs. The need for liquidity was immense keeping in view that impacted clients needed funds for staying afloat and rebuilding their lives.
- MFIN was the driving force behind the conceptualization and launch of credit guarantee scheme for MFIs which provided access to low-cost credit from banks, and was particularly beneficial for the small MFIs. 38 Member NBFC-MFIs received about Rs 7,519 Cr from banks under the scheme and by end-March 2022 around 95% of the funds were disbursed to over 17.7 Lakh borrowers.
MFIN was recognized as a Self-regulatory Organization (SRO) by the RBI in 2014. However, since its inception, MFIN was envisaged and constituted as the SRO. This was articulated in its Article of Association and Bye-Laws - guiding and governing its vision, mission, focus and work towards Responsible Business. Over the years, MFIN has diligently worked with its Members and industry stakeholders to ensure this. Key contributions of MFIN in this regard are:
- Developed Code of Conduct (CoC) in 2011 focusing on customer protection and constantly revised it for even higher standards to address emerging challenges and expectations. Guided industry practices on specific issues and areas through directives, advisories, guidance notes.
- Led a collaboration with other industry associations and lenders to develop the Code of Responsible Lending (CRL) to voluntarily bring all lenders in the space to agree on uniform customer protection norms.
- Provided regular capacity building and monitoring support to lenders to improve their practices around customer-protection and responsible lending. A surveillance system, using data as well as field-level inputs, to constantly track malpractices for immediately action.
- Established strong Enforcement Framework within MFIN to guide, monitor and enforce lenders’ adherence to regulatory and industry standards.
- Widely disseminated financial awareness collaterals to the customers focusing on their rights and responsibilities as they access credit.
- Set up an industry-level Customer Grievance Redressal Mechanism (CGRM) with a dedicated Toll-Free Number to allow customers of Member NBFC-MFIs to voice their concerns and seek support to resolve their queries/grievances.
Microfinance Industry draws its resilience from the grit of its low-income clientele who are mostly excluded from mainstream financial services, suffer several limitations, face frequent economic setbacks, withstand every shock-personal, societal, economic, political, natural from mainstream systems whether local, national, or transnational.
Over the last decade, the sector has witnessed several crisis events but each time it has emerged out stronger. Some of such events include:
- National level (AP crisis,demonetisation, and Covid-19)
- Regional/State level (Assam issue most recently and in the past Kolar and Krishna crisis).
- Natural Disasters (Cyclones Fani in Odisha, Ockhi in Kerala, Gaja in Nagapattinam, Maharashtra floods etc.)
The resilience of the sector has been built over the years with lessons learned from each crisis and focus on development of institutional capabilities, industry vide standards, structures, and processes fully backed by updated technologies to be able to withstand shocks. Another factor has been the investors’ confidence in the sector which continues to strengthen. Intent of the MFIs has always been to honour their debt obligations. Even during demonetization, none of the institutions defaulted and the investor experience during the Covid-19 pandemic has been equally good despite liquidity stress.
The sector has innovated to address systemic risks, be it development of the credit bureau ecosystem, adopting cashless disbursements and repayment collections or more recently conceptualisation of a natural catastrophe insurance product for the microfinance borrowers to enhance their coping ability during such events. Most importantly, as a close-knit sector, the larger NBFC-MFIs are always ready to step in to support if needed whether through pooling of assets for securitisation or providing funds to the smaller MFIs to assuage liquidity stress.