?MFI industry bodies to act as SROs?

The Reserve Bank of India (RBI) on Tuesday directed industry bodies representing microfinance institutions (MFIs) to act as self-regulatory organisations (SROs) to help in effective monitoring and functioning of the sector.

The RBI will accord recognition to industry associations as self-regulatory organisations for non-banking finance companies (NBFCs) engaged in microfinance, said a press release issued by the central bank on Tuesday.

Back in 2011, a committee headed by YH Malegam had been appointed to study the issues and concerns of the microfinance industry, which recommended a detailed regulatory framework for MFIs. Among other recommendations, the committee had suggested that a self-regulatory structure for MFIs be put in place.

While membership of SROs has not been made mandatory, the RBI has encouraged regulated MFIs to voluntarily become members. ?The membership of NBFC-MFIs in the industry association/SRO will be seen by the trade, borrowers and lenders as a mark of confidence and removal from membership will be seen as having an adverse impact on the reputation of such removed NBFC-MFIs,? said the RBI release.

SROs recognised by the RBI will have to adhere to a set of functions and responsibilities, such as creating a code of conduct recognised by the RBI and having a grievance and dispute redressal mechanism for clients of the MFIs.

The SRO would also take on the responsibility of ensuring borrower protection and education, along with monitoring and surveillance of MFIs and their financials.

?This is a recognition of the fact the RBI wants to bring the industry body formally into its regulatory framework”, said Alok Prasad, chief executive at MFIN ? the current industry body for MFIs. ?We will be making an application very soon to become an SRO. The SRO can act as a delegatee of the RBI to deal with MFIs which do not adhere to the code of conduct and also help in addressing and finding solutions to industry issues,? he added.

MFIN said that it already has an enforcement committee in place to take care of complaints from clients and has also set up a helpline in Andhra Pradesh and Tamil Nadu, which it hopes to extend across the country.

Microfinance institutions are also in favour of the RBI’s move, saying that more stringent norms will help the industry. ?The code of conduct that is being developed also needs to be transparent and simple enough for poor people to understand what is going on in MFIs,? said Chandra Shekhar Ghosh, CMD at Bandhan, the largest microfinance institution in the country.