Microfinance Industry To Self-Regulate With Code For Responsible Lending

Three self-regulatory organisations on Monday jointly released a code for responsible lending for the micro-credit industry with an aim at bringing more transparency and address customer issues.

The Code for Responsible Lending was launched by Microfinance Institutions Network and Sa-Dhan along with Finance Industry Development Council .

The Code, launched at Sa-Dhan’s 15th Annual National Conference, aims to lay down uniform principles for customer-conduct in micro-credit, and is sector specific and entity agnostic, MFIN said in a statement.

One of the major guidelines in code mandates that only three micro-credit entities can lend to a client at the same time.

This means that if a client has three active loans from any provider, then a fourth entity will not be able to lend to the client.

Non-banking microfinanciers are additionally required to ensure that not more than two NBFC-microfinance institutions lend to a customer. Besides, prior to sanctioning of a loan, a micro-credit provider should ensure that the total indebtedness should not exceed Rs 1 lakh per customer, MFIN said.

In addition to the responsible code, a revised industry Code of Conduct was also released for microfinanciers that will act as a binding and compulsory set of principles in relation to lending practices, the release said.

“This is a significant self-regulatory step across all RBI regulated entities and others that aims at safeguarding the interests of low-income customers through enhancing transparency and compliance,” said Manoj Nambiar, Chairperson, MFIN. “We are happy to note that over 90 entities have signed up for the CRL as "Responsible Lenders" and are hopeful that soon all microfinance lenders will come forward to endorse and adhere to it.”

Vijayalakshmi Das, Chair, Sa-Dhan added that the industry code has been strengthened in the areas of risk management, responsible lending and human resource practices which include training and client education.

MFIN further said a significant development in the CRL adoption was the signing up of the FIDC, the self-regulatory organisation for registered NBFCs.

This makes the CRL more inclusive in its coverage, it added.

A wide range of providers such as NBFC-MFIs, banks, small finance banks, NBFCs and Non-profit/Section 8 MFIs, under different regulatory framework, provide micro-credit to over 5 crore customers from low-income households.

“Building on key regulatory customer-protection measures as described in RBI Master Directions for NBFC-MFIs, RBI Fair Practice Code for Banks and NBFCs, Industry Code of Conduct and RBI Charter of Customer's Rights for micro-credit sector, CRL includes most critical elements which are required to be adopted by providers while delivering micro-credit loan,” MFIN said.

As per MFIN's first quarter 2019-20 Micrometer report, the entire microfinance industry has witnessed a growth of 42.9 percent year-on-year.

Banks hold 40.9 percent share of the total micro-credit while NBFC-MFIs are the second largest provider of micro-credit accounting for 30.2 percent share. SFBs have total share of 17 percent, NBFCs 10.8 percent and other MFIs account for 1 percent share.