Self-regulatory organisations or SROs will assist the RBI in monitoring MFIs.
The Reserve Bank of India (RBI) has decided to grant self-regulatory status to associations in the microfinance industry.
These self-regulatory organisations (SROs) will assist the RBI to regulate and monitor microfinance institutions (MFIs, which engage in micro-lending) that have registered themselves as non-banking finance companies (NBFCs).
Currently, there are only two MFI associations: the Micro Finance Institutions Network (MFIN) and Sa-Dhan.
Alok Prasad, CEO of MFIN, said that it will apply for the SRO status by next month. “It is about converting from de facto to de jure status,” he said, adding that MFIN had already taken measures to fit in the role of an SRO.
After approval, Prasad said MFIN will focus on tightening the monitoring and grievance-redressal mechanisms. The association is in the process of hiring senior-level management for the same.
“The membership of NBFC-MFIs in the 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.
MFIN has 44 members that make up 85-90% of the industry. According to RBI norms released on Tuesday, an SRO must have at least one-third of the NBFC-MFIs as its members.
An SRO will form a code of conduct to be followed by its members. While membership is not mandatory, the RBI has advised all NBFC-MFIs to voluntarily become members of at least one SRO.
It should have adequate capital to be able to discharge its functions without being overly dependent on its members, said the RBI. While Sa-Dhan will also apply for SRO status, it might fall short of the capital adequacy condition set by the RBI, according to industry experts.
An SRO will need to have a compliance officer who will keep the RBI informed on all developments in the industry.
Regulation of MFIs had emerged a priority ever since some borrowers committed suicide a few years back due to alleged heartless and ruthless loan recovery practices of MFIs.
The RBI had set up a committee under the chairmanship of Y H Malegam to study the issue in depth and make recommendations, most of which were accepted by the regulator.
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