Microfinance industry revises code of conduct

The revised code will lay down what the customers should expect and not expect from the lender


New Delhi: Robust standards of corporate governance, measures to reduce over-indebtedness among clients, mandatory use of Aadhaar within two years and strengthening grievance redressal management are some of the elements in the revised code of conduct for microfinance institutions.

The revised industry code of conduct was launched jointly by the two industry self-regulatory organizations (SROs)—Sa-Dhan and Microfinance Institutions Network (MFIN)—in New Delhi on Wednesday at the Inclusive Finance India Summit 2015. This is the second edition of the code which debuted at the Microfinance India Summit 2011. The working group which drafted the revised code comprised representatives from Small Industries Development Bank of India (Sidbi), International Finance Corp. (IFC), Micro-Credit Ratings International Ltd (M-CRIL), Sa-Dhan and MFIN.

“The first edition was a joint effort of MFIN and Sa-Dhan. However, this time, we brought in more stakeholders so as to provide a wider canvas for governance,” said Ratna Vishwanathan, chief executive officer, MFIN. SIDBI and IFC provides credit to MFIs and M-CRIL provides social rating for the MFI sector.

In 2007, Sa-Dhan had launched a voluntary code of conduct after a microfinance crisis emerged in Andhra Pradesh’s Krishna district. After the crisis blew up in 2010 with debt-related suicides among borrowers and many MFIs collapsed because of non-repayment of loans, another code of conduct was launched.

“One of the considerations to revise the code was that the SRO mechanism is now in place and the industry has undergone many changes such as use of credit bureau ratings and we wanted to factor them all in,” said P. Satish, executive director, Sa-Dhan.

MFIN was accorded the status of SRO in February 2014 and Sa-Dhan was accorded the same status in February 2015. Earlier, they were independent industry associations.

“We felt that with micro-regulations coming in and MFIs such as Bandhan Financial Services getting a universal bank licence and some others getting small finance bank licences, it was time to revisit the code to make it more robust as it is a dynamic set of rules,” said Vishwanathan.

Interestingly, eight out of the 10 entities granted in-principle approvals to open small finance banks in September are microfinance institutions.

The revised code also includes a supplementary document “MFIs’ Commitment to Customers” recommended by the working group which is to be used as a separate pull-out to be given to the customers at the time of loan disbursement. This will lay down what the customers should expect and not expect from the lender. “It will make customers aware about the governing structure,” added Vishwanathan.