Microfinance industry association Sa-Dhan has emphasized the need for microfinance institutions to adopt its proposed code of conduct so as to treat clients more fairly and to avoid coercion during the loan repayment process. The code of conduct, which has yet to be approved, covers issues ranging from how its staff should interact with clients in not entering homes to avoiding repayment pressure if there is a case of severe illness. Sa-Dhan is also encouraging transparency across an MFI’s operations to help promote better business practices and make commercial banks comfortable in once again lending to MFIs.

Dinesh Unnikrishnan

Mumbai: It’s back to basics for the Rs. 20,000 crore Indian microfinance sector as industry lobby group Sa-Dhan, which counts at least 250 microfinance institutions (MFIs) as members, has asked all such firms to deal “fairly” with debtors and avoid coercion in collecting dues.

The association will in the next few weeks discuss compliance issues with individual MFIs, Sa-Dhan executive director Mathew Titus said. “The effort is to move towards a new regulatory regime,” he added.

Sa-Dhan’s proposed code of conduct, which has been circulated among members, says recovery officers of MFIs should avoid “confronting the clients or their family members under any situation” and the staff should “not enter the house of the client for recovery of loans”. MFIs should also not insist on repayment “in case there is severe illness in the family of the clients”.

The code needs to be approved by the boards of individual companies.

MFIs extend tiny loans to poor borrowers, typically for a year, at around 24% interest. The industry is facing a crisis after Andhra Pradesh, which accounts for a quarter of the domestic microlending market, passed a strict law in October to regulate MFIs following reports of coercion in recovering loans that allegedly led to suicides.

Loan repayments have since fallen drastically to around 10% for most MFIs, including the country’s largest and only listed microlender, SKS Microfinance Ltd, and Basix group-promoted Bhartiya Samruddhi Finance Ltd, both of which are based in Andhra Pradesh. SKS and Basix saw at least one-fourth of their loan book shrinking in the past nine months.

Most MFIs have had to stop fresh loans. Commercial banks, too, stopped lending to these firms, adding to their woes.

The latest development on self-regulation has coincided with a meeting Sa-Dhan held last week with Reserve Bank of India deputy governor K.C. Chakrabarty and chiefs of large commercial banks in Mumbai to discuss urgent resumption of fresh funding to the ailing sector that is facing severe cash crunch.

At the meeting, microlenders assured commercial banks they will stick to the code of conduct and avoid resorting to any harsh practices or discriminate against borrowers based on caste or religion.

Chakrabarty asked lenders to restart lending to the sector considering the larger goal of financial inclusion, according to a person who attended the meeting.

“We told them (banks) we will ensure compliance (of best practices). We will repay. I do hope they will start lending now,” said the person, who did not want to be named.

Sa-Dhan has also assured banks that MFIs will be transparent in their operations and supply information on customers and business through a credit bureau. The association has asked its members to report their business details to credit bureaux.

Indian banks have lent a minimum Rs. 14,000 crore to the industry with Small Industries Development Bank of India and State Bank of India (SBI) having the largest exposures.

Senior bankers, however, made it clear they will not lend to MFIs unless they are convinced that unfair practices do not occur again and operations become more transparent.

“They have to convince all stakeholders—banks, regulator and customers—that they have changed their behaviour,” said an SBI official. “If they continue to do what they do now, then things can again become difficult for them,” the banker said, requesting anonymity.

Titus is optimistic about changes in the industry and the approach of microlenders to customers. “Our findings indicate there is a scope of improvement on aspects of the code of conduct as well as strengths to be built on,” he said.

“What we are telling MFIs is that they should bring in training programmes to improve the staff behaviour,” he added.

Although 87% of MFIs have guidelines on staff behaviour, only 20% of them carry out internal audits on field staff behaviour, according to a social performance study conducted by Sa-Dhan.

“Since many complaints are coming from clients on unethical staff behaviour, internal audit assumes importance and needs to be carried by all MFIs,” Titus said.

As far as avoiding over-indebtedness is concerned, 63% of MFIs conduct client appraisal before giving fresh loans, but only 39% of them assess client indebtedness to other institutions, which has emerged as a major criticism of the sector, he said.