‘MFIs need to introspect more’
The country’s microfinance sector is growing rapidly, has outstanding loan portfolio of Rs 18,000-19,000 crore. Even the Reserve Bank of India (RBI) has appreciated the micro lenders’ ability to reach out to the poor with doorstep facilities. Yet, it has time and again drawn criticism for its corporate governance practices. Their rapid growth has also been cause for concern for many, as unbridled loan growth could lead to a degradation of asset quality. Microfinance practitioners too understand the need to improve governance issues to avoid a possibility of distress in future. Their latest self-regulation drive by putting a code of conduct in place is seen as a move towards this pursuit. Chandra Shekhar Ghosh, founder and managing director of Bandhan Financial Services, one of the leading microfinance institutions (MFIs), gives his perspective on the code of conduct and the way forward.
“All of us have agreed to the code of conduct to strike a balance between our social and commercial goals,” says Mr Ghosh, who is also a board member of the new industry organisation MicroFinance Institutions Network and the existing Sa-Dhan. A majority of the MFIs started their journey with a social motive but have eventually turned into more commercially-oriented entities to support the substantial growth that the sector has witnessed so far, he notes, adding that the market was huge and offered plenty of opportunities for new entrants. That’s why new investors are coming in a big way with their capital support. Social investors such as the Small Industries Development Bank of India, National Bank for Agriculture & Rural Development and multilateral funding agencies like IFC and KfW are ready to invest in the MFI sector. Commercial investors like private equity funds too are exploring every possibility to make quick returns. That’s why a fine balance between social and commercial aspects of the MFI business is the order of the day, he adds.
“We need to introspect more. Without playing down the need to take a commercial approach to make our business viable, we have to find out whether we are completely shifting away from our social orientation. That is why, we are now stressing upon the concept of responsible credit.”
What does it precisely mean? “It means being responsible in credit delivery and that we do not lend more than what borrowers desire or more than their repaying capability. We are telling all MFI members to lend only after proper examination of cash flow of borrowers.” Overexposure of loans to a borrower can lead her into a debt trap and the lender would suffer as a result. The MFI code stipulates that not more than three microlenders can lend to a single borrower and their cumulative loan offer should not surpass Rs 50,000 at any point in time. This ceiling is applicable to unsecured loans. MFIs typically offer unsecured loans of small-ticket size to poor women and that’s how they make a difference when compared to bank lending.
The code also specifies the need to follow fairness in recovery and it is imperative that MFIs do not use abusive or unethical tactics to collect
their dues. “We understand that if any of our practices convey a bad message, then all microfinance players will be in trouble.” He admits to gaps in the disclosure mechanism and that, henceforth, MFIs will mention all features of the loan including interest rate, processing fee, security money and insurance premium in the passbook or in the application form.
their dues. “We understand that if any of our practices convey a bad message, then all microfinance players will be in trouble.” He admits to gaps in the disclosure mechanism and that, henceforth, MFIs will mention all features of the loan including interest rate, processing fee, security money and insurance premium in the passbook or in the application form.
“But the problem is that the poor do not understand the nitty-gritty of interest rate calculations. They are more interested in knowing their weekly payout. Many of them can’t read or write or calculate interest rates, but they can compare and choose their lender. So, it is difficult to con them. But lenders still try to confuse them. We have now stressed on bringing in more transparency in our operation to avoid any misdeed,” clarifies Ghosh. The MFI code has also proposed to encourage a grievance redressal system. Their umbrella network will appoint Ombudsmen in each of the six broad regions.
“The microfinance sector is fairly new and is going through an evolution of sorts. The code of conduct aims to improve the life of a small borrower and the way lenders treat their customers. But if anything, it will streamline our practices for the better so that we manage the future challenges well.”
URL: http://economictimes.indiatimes.com/Opinion/MFIs-need-to-introspect-more/articleshow/5875018.cms