Sa-Dhan gets self-regulatory organization status after MFIN2 min read . Updated: 12 Mar 2015, 07:26 PM IST
The move will give Sa-Dhan powers to monitor microfinance institutions and ensure lenders are in compliance with the rules
New Delhi: Sa-Dhan, an association of microfinance institutions (MFIs), said on Thursday that the Reserve Bank of India (RBI) had accorded it the status of a self-regulatory organization (SRO), which will give it the powers to monitor MFIs and ensure the lenders are in compliance with the rules.
Sa-Dhan is the second association in the business of micro-lending to be given the SRO status by the central bank. Microfinance Institutions Network (MFIN) last year became the first. MFIs advance small loans to low-income borrowers who typically are not covered by the formal banking system.
“In August 2014, we held our annual general meeting and decided to apply for SRO. We recently got the approval from RBI," said Brij Mohan, a board member of Sa-Dhan.
Though Sa-Dhan is an older association than MFIN, the latter got the status first as “Sa-Dhan was late in applying", said Mohan.
MFIN is an association of MFIs operating as non-banking financial companies (NBFCs). Sa-Dhan has members across the NBFC-MFI category as well trusts, so-called section 25 companies that plough back any profits they make back into the business, and not-for-profit organizations.
In October 2010, RBI formed a committee under financial sector expert Y.H. Malegam that recommended an SRO framework for MFIs to regulate the sector.
The committee was set up after the Andhra Pradesh, the biggest market for micro loans, approved an ordinance that reined in MFIs following reports that coercive loan recovery practices were driving over-extended borrowers to commit suicide.
An SRO is required to formulate a code of conduct for members and ensure compliance, have an effective grievance redressal system for borrowers and a a dispute resolution structure for members.
“We will have a two-way approach of operating. First, we will educate members and help in capacity building and second, we will ensure client protection," said Mohan.
Sa-Dhan plans to form a compliance committee and a grievance redressal committee.
NBFC-MFIs will now have a choice between Sa-Dhan and MFIN to report to. The Malegam committee report said an MFI should be member of at least one SRO. Some NBFC-MFIs now are members of both.
“It is good to have competition for quantifiable products, but when the issue is about governance, multiplicity may not work given that there is no standardization of benchmarks," said Ratna Viswanathan, deputy chief executive officer, MFIN.
According to her, MFIs may go to SRO whose compliance structure will suit their requirements. Mohan says that one has to wait and watch the course NBFC-MFIs adopt.