Afroz Jahan says she hasn?t yet heard of anyone losing a television set or household items, but it is a distinct possibility. Debtors of the local Apna Kosh microcredit arm of Chanderi, Madhya Pradesh-based weavers? collective Bunkar Vikash Sansthan, are required to share details of valuables when taking a loan. ?They (Apna Kosh) will make up the difference somehow,? she says in Hindi, in response to a question about failure to repay.
Microfinance institutions (MFIs) and self-help groups (SHGs) typically give small loans to groups of poor people without the latter putting up collateral or guarantees. Jahan?s testimony to the constant threat of repossession and possible harassment faced by local borrowers highlights one of the most persistent problems plaguing the country?s microcredit segment ? that of monitoring an industry that comprises both small and large entities, including non-governmental organisations, SHGs, MFIs and larger MFIs turned non-banking finance companies (NBFCs).
Concerns around the lending and recovery practices of microfinance organisations in Andhra Pradesh had in the second half of 2010 brought them in the spotlight for the wrong reasons. A spate of suicides?allegedly related to multiple lending by MFIs, leading to over-indebtedness, and coercive recovery practices ? had led the state government in mid-October to issue an ordinance which sought to bring MFIs under the state money lenders? Act, set up fast-track courts to resolve complaints of harassment by recovery agents, and requiring all MFIs operating in the area to register with the district-level authority.
Now, in the absence of a nation-wide microfinance legislation, microfinance organisation have developed internal mechanisms, including codes of conduct, enforcement committees and grievance redressal programmes.
Vijay Mahajan, chairman of the Hyderabad-headquartered BASIX group and president of Microfinance Institutions Network or MFIN, explains that while efforts were already afoot since 2005-06 to put in place a set of internal guidelines for the industry, the initiatives received an impetus after a series of crises hit the sector. ?In 2009, MFIN, a self-regulatory organisation (SRO) of NBFC MFIs, was formed. We had by this time identified some seven or eight points, including multiple and reckless lending, poaching of staff and clients within the sector,? elaborates Mahajan, adding that over the next six months, the SRO conducted a series of meetings in which it put together a code of conduct.
?In the case of Andhra Pradesh, we are even ready to reduce the total credit amount to Rs 40,000 (currently, the MFIN code of conduct stipulates a maximum loan size of Rs 50,000 per creditor); and we are counting both loans from SHGs and MFIs to make sure they do not exceed three loans per creditor,? says Mahajan, adding the network MFIs are in talks with the state government following the crisis. Andhra Pradesh ranks among the top 5 states in terms of microfinance penetration, accounting for at least 23.5 million microfinance clients, according to The State of the Sector Report 2010.
Today, MFIN relies on lenders? discipline to enforce the code. Mahajan explains that larger MFIs often need to tap sources such as public-sector banks and SIDBI for funds. These institutions can add on borrowing MFIs conditions such as compliance to the code. MFIN has since its institution received 150 inter-member complaints on matters such as an MFI agreeing to issue a fourth loan to a creditor.
Nilesh Arya of Sadhan says that following the Andhra Pradesh ordinance, the association has revved up the implementation of its code of conduct. Sadhan plans to shortly publish its first report on Ethical Practices and Client Protection for MFIs in India. Sadhan, an association of community finance development organisations, has 251 members across 20 states with a combined members? outreach of at least 27 million clients, as on 31 March 2010.
N Srinivasan, author of the State of the Sector Report 2010 , says: ?Regulation requires not only intent, but also the bandwidth in terms of skill sets, people and processes. Self-based effort is not going to be easy, as the MFIs are still looking at their own growth.?
?Even noble intentions have to be kept on track by an external force,? he adds.