Microfinance Firms Asked to be ?Fair? to the Poor

Tuesday, July 5, 2011

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.

Source: livemint.com (link opens in a new window)