The microfinance industry in India has emerged from a crippling crisis by reinventing itself. The fact that the industry has appointed a tough self-regulatory body is testimony to its commitment to a client-centric approach.
In fact, the self-regulation model has traditionally been viewed with scepticism. There would seem to be an in-built conflict between advocating and promoting the interest of the individual member and the larger interest of the industry.
Globally, the model hasn’t met with much of success. Most countries have either weak or non-existent financial consumer protection rules, that do not touch providers of financial services at the base of the pyramid.
Some Latin American countries such as Brazil, Ecuador and Peru, besides Mexico, have a semblance of self-regulation in place. Mexico was one of the first countries to adopt self regulation in microfinance.
Mexican microfinance had humble beginnings, with the absence of state and international actors’ support of early efforts to promote lending to the poor. Early experiments in microfinance, cajas populares or ‘community finance’ in Mexico began under the guidance of the Catholic Church in the 1950s.
Community funds, in general, were small, informal institutions that offered financial services to the rural poor in particular. The expansion of the community funds did not go unnoticed by the state for long, which then sought to organise and regulate the sector. As a response, six federations formed together to create Mexico’s first microfinance association: the Mexican Confederation of Community Funds (CMCP, Confederación Mexicana de Cajas Populares) in 1964.
It was in the 1990s that various microfinance providers evolved into microfinance associations and consolidated as a sector. These partnerships, however, did not dissolve once the state threat subsided. Even though microfinance associations in Mexico played a leading role in influencing the regulatory regime, there has been stagnation in the self-regulatory functions, mostly because of a lack of strong supervisory capacity.
The Indian microfinance industry has been through a rollercoaster trajectory in the past five years, since the ‘Andhra crisis’.
The Micro Finance Institutions Network (MFIN), set up as an industry body just before the Andhra crisis, has played a self-regulatory role. It has promoted the twin roles of advocacy and regulation as complementary aspects of building a robust, client-centric industry.
Based on the RBI’s Malegam Committee Report, which recommended formation of self regulatory organisations (SRO) in the microfinance sector, the central bank had called for applications. On June 16t, it formally recognised MFIN as an SRO. The establishment of an SRO is a first of its kind in the financial inclusion space in India.
Industry bodies primarily pursue advocacy roles. However, the RBI in conceiving an inclusive and transparent self-regulatory structure has sought to allow the NBFC-MFI industry to regulate itself. With an SRO in place, the RBI is looking at a layered regulatory structure.
The membership of NBFC-MFIs to the industry association/SRO is seen by trade, borrowers and lenders as a mark of confidence. Removal from membership could be seen as having an impact on reputation. While membership to the SRO is not mandatory, NBFC-MFIs are encouraged to become members.
For a financial services SRO to succeed, it needs to have government support in terms of funding, clearly spelt out mandates and the wherewithal to take action for non-compliance. All this, but under the overall umbrella of the regulator.
MFIN has a limited mandate as it has not formally been accorded statutory powers. This would need an amendment in the RBI Act. That said, it is a step in the direction of industry taking on growing responsibility.
SOURCE: The Hindu BusinessLine
Apr 23, 2010 26
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