Microfinance Institutions Network (MFIN) and Sa-Dhan, the Reserve Bank of India recognised self-regulatory organisations and industry associations for the microfinance industry, along with Finance Industry Development Council (FIDC), have jointly unveiled the ‘Code for Responsible Lending’ (CRL) for the micro-credit industry.
The launch was done today at Sa-Dhan’s 15th Annual National Conference in New Delhi. The CRL, aims to ensure uniform principles for customer-conduct in micro-credit. It is sector-specific and entity agnostic.
Further, a modified industry Code of Conduct (CoC) was also introduced for Microfinance Institutions (MFIs) that will act as a binding and compulsory set of principles w.r.t. lending practices.
According to Manoj Nambiar, Chairperson, MFIN, “Microfinance sector has seen a robust growth over the last few years and after the segregation of various entities in this segment, the landscape has evolved markedly. While it has added to the overall expansion of the industry, it has also presented us with a challenge where there is no uniform regulation for different regulated entities serving micro-credit clients. This is a significant self-regulatory step across all RBI regulated entities & others that aims at safeguarding the interests of low-income customers through enhancing transparency and compliance. 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, said, “This launch is in line with our objective of furthering responsible finance across the entire sector. Many lenders of diverse legal form are coming on-board, as the Code engages with all those catering to the same microfinance client. It is hoped to bring about a level playing field for all and ensure client protection is more adequately addressed. Meanwhile, the Industry Code has been strengthened in the areas of risk management, responsible lending and HR practices which includes training and client education.”
A significant move in the CRL adoption was the participation of the Finance Industry Development Council (FIDC), the Self-Regulatory Organisation for Registered NBFCs. This increases CRL’s inclusivity in its coverage.
Raman Aggarwal, Chairman – FIDC, said, “We are pleased to sign the Code for Responsible Lending along with MFIN and Sa-Dhan. The NBFC sector has been going through a challenging scenario for the last one year where banks, which are the major source of funding, have become risk-averse. CRL shall be a step in the right direction to restore the confidence in the Non-Bank lending community, as this shall bring better discipline and harmony among the Asset Financing, Loan Financing and Micro Financing NBFCs.”
For the last two decades, the microcredit sector has effectively mainstreamed itself as a key point of delivery to offer credit to low-income households. As of now, a plethora of Providers such as NBFC-MFIs, Banks, SFBs, NBFCs and Non-profit/Section 8 MFIs, under the various regulatory framework, ensure micro-credit to over five 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 the micro-credit sector, CRL includes most critical elements which are required to be adopted by providers while delivering micro-credit loan.
One of the pivotal guidelines in CRL mandates that only three microcredit entities can lend to a client at the same. 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.
NBFC-MFIs are additionally required to ensure that not more than 2 NBFC-MFIs lend to a customer. Moreover, prior to sanctioning of loan, a micro-credit provider should ensure that the total indebtedness should not exceed Rs 1 lakh per customer.
Besides, the revised industry Code of Conduct (CoC) unveiled by MFIN and Sa-Dhan for the microfinance sector focuses on enhancing the responsible lending activities and practices which is central to customer welfare.
Going by the fact that customers of micro-credit may not always pose complete understanding of the product and its impact, it is crucial that providers take larger responsibility to ensure that customers’ interests are protected through internalizing these practices.
Both CRL and CoC are focused on highlighting and advancing ‘responsible lending’ practices in microfinance. A microfinance customer as defined by the RBI (for NBFC-MFIs) is one that holds an annual household income of Rs 1 lakh in rural India and Rs 1.6 lakhs in urban India.
As per MFIN’s Q1FY20 Micrometer report, the entire microfinance industry has witnessed a growth of 42.9 percent YoY. Banks hold 40.9 percent share of the total microcredit universe while NBFC-MFIs are the second largest provider of micro-credit accounting for 30.2 percent share. SFBs have total share of 17.0 percent, NBFCs 10.8 percent and other MFIs account for 1 percent share in the microfinance universe.