Customer Protection through MFI Self-Regulation in India


By Rachit Khaitan, IFMR Finance Foundation

Comments on the Revised Code of Conduct for the Microfinance Industry

M-FIN and Sa-Dhan, two key Self-Regulatory Organisations (SROs) of the microfinance industry jointly released their revised Code of Conduct for the Microfinance Industry in December 2015. The revised Code of Conduct following from the original 2011 version, is vital for setting standards of behaviour and maintaining norms through collective action[1], with a view to uphold client protection in the industry in line with and in some aspects beyond regulatory statutes.

In this post, a few salient and commendable features of the revised Code of Conduct are highlighted, alongside potential concerns and recommendations.


This section features an important commitment to “disclose all terms and conditions to the client, in a form and manner that is understandable, for all services offered.” It further indicates a commitment to securing clients’ informed consent and communicating details in a language understood by the client. These details include simple concepts such as all associated fees and charges but also more complex aspects such as interest and fees payable as an all-inclusive Annual Percentage Rate (APR) and equivalent monthly rate. This is in line with the RBI Guidelines for Fair Practices Code for NBFCs[2].

However, given the sometimes complex aspects of information that are imparted to clients, there is necessity for MFIs to better ensure truly informed consent based on demonstrated customer understanding. This could be implemented, for instance, in the form of a short verbal quiz about product features and obligations to be administered to the client at the point of sale based on some rules of thumb.

Avoiding over-indebtedness:

The sub-section on over-indebtedness is an important part of the Client Protection section.

It includes a commitment to “conduct proper due diligence as per [the MFI’s] internal credit policy to assess the need and repayment capacity of clients before making a loan and must only make loans commensurate with the client’s ability to repay”. This addresses a key aspect of preventing bad outcomes by verifying that loan clients are able to afford paying back the principal and the interest by the end of the loan tenure. Given the critical nature of this commitment, there is also a necessity to put in place a commitment for a Board-approved policy to ascertain client ability to repay and prevent financial distress. This would be in line with the RBI Charter of Customer Rights[3] and the IBA Model Customer Rights Policy[4] which includes a commitment to prepare Board-approved policy incorporating the Right to Suitability, stated as “products offered should be appropriate to the needs of the customer and based on an assessment of the customer’s financial circumstances and understanding.”

There is a concern that this does not however include a commitment to ascertain whether clients are able to make repayments without substantial financial stress throughout the tenure of the loan. For instance, liquidity mismatches between structured instalment frequencies (typically weekly or monthly) and household cashflows could lead households to take on additional loans from informal sources or sell off assets such as livestock or land at below market prices, even though such households are comfortably able to repay the loan by the end of the tenure. This concern is exacerbated by the absence of adequate savings mechanisms for MFI clients, who are oftentimes unable to safely put away relatively large sums of money for future use. There is thus a necessity to enhance the nature of MFI due diligence for better client outcomes. There is also a necessity for a commitment to design and distribute products that are appropriate and flexible to address the needs and financial situations of customers, while preventing financial distress. This is in line with the RBI Master Circular on Customer Service in Banks which indicates the role of a Customer Service Committee of the Board to address the product approval process “with a view to suitability and appropriateness.”[5]

The sub-section also includes a commitment for an MFI not to exceed the borrowing limit of Rs. 60,000 for a JLG customer (which is lower than the RBI mandated total indebtedness cap of Rs. 100,000)[6] in a group arrangement or to be the third lender to a client. There is a concern that such caps on lending might be restrictive to households that might have a genuine need and ability to repay higher loan amounts. Moreover, there does not seem to be clear basis for both cap values, especially when MFIs are already committing to conduct proper due diligence on client need and repayment capacity of every client.

There is an additional concern that customer data from credit bureaus may not provide a complete assessment of overall household indebtedness. Credit institutions are yet to fully act upon RBI’s requirement[7] to report to all credit bureaus, especially in terms of loans from the bank and SHG channels, although there has been steady progress[8]. Credit bureau data is also, at best, unable to include household debt outstanding from informal sources such as local moneylenders. There is thus a need for a commitment to better understand customer indebtedness and financial situation through customer self-reported information, which when triangulated with credit bureau information can provide a more complete assessment of household indebtedness.

The sub-section includes important commitments with regard to authenticating client identity and sharing client information. The move towards Aadhaar-based KYC within two years will commendably enable more accurate credit bureau assessments of outstanding debt. The challenges of implementing a seamless KYC interface will need to be overcome with robust yet low-cost technology solutions that enable error-proof and real-time authentication.


The new Code of Conduct lays out commitments to have in place several Board-approved policies for debt restructuring, dealing with delinquent clients, fair collection practices, and processes to raise client awareness. Board-approval is valuable for putting in place policy for important client protection aspects that is pervasive across all levels of an MFI. This is therefore a very progressive development.

There is also a commendable commitment to prepare a monthly report on grievances received, resolved, and pending for senior management review and periodic reports to the Board. However, by the same rationale as the commitment on audit and compliance, there needs to be an additional commitment for appointing an independent grievance redressal committee that is directly accountable to the Board. This is in order to prevent a potential conflict of interest that operations staff could face leading to under-reporting of customer grievances.

Customer rights:

The new Code of Conduct also includes an important section that outlines the rights of a customer, in addition to commitments from participating MFIs, in similar vein as the RBI Charter of Customer Rights[9]. There are customer rights outlined to ascertain terms and conditions and current status of the loan and avail necessary documents and receipts, which are in line with the RBI’s Right to Transparency, Fair and Honest Dealing. There are also customer rights outlined to access a grievance redressal mechanism with the help of designated staff, receive acknowledgment and a response to grievance within a prescribed time limit, and appeal to a higher internal level or an external redressal mechanism (the nodal office of the RBI) if desired, which are in line with the RBI’s Right to Grievance Redress and Compensation. Other rights outlined in the RBI Charter, including the Right to Fair Treatment and Right to Privacy are included as commitments to customers, although given their relevance, need to be included as rights as well. Finally, there is a need for a stronger commitment and customer right to Suitability.

[1] SEEP Network – Codes of Conduct and the Role of Microfinance Associations in Client Protection (2012): http://www.seepnetwork.org/codes-of-conduct-and-the-role-of-microfinance-associations-in-client-protection-resources-345.php

[2] RBI Master Circular – Fair Practices Code (July 2015): https://rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9823

[3] RBI Charter of Customer Rights (December 2014): https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=32667

[4] IBA Model Customer Rights Policy (January 2015): http://www.iba.org.in/Model%20Policy/Model_Customer_Rights_Policy_Amended_Final_27_1_15.pdf

[5] RBI Master Circular on Customer Service in Banks (July 2015): https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9862

[6] RBI Master Circular on PSL Targets and Classification (April 2015): https://rbi.org.in/Scripts/NotificationUser.aspx?Id=9688&Mode=0#ANN

[7] RBI Directive on Membership of Credit Information Companies (CICs):

[8] Article on Livemint (August 29th, 2015): http://www.livemint.com/Industry/FRgAFR9Clo3nvMCdGFl37L/MFI-credit-bureaus-comb-client-data-to-smooth-microloans.html

[9] RBI Charter of Customer Rights (December 2014):


A summary of NBFC-MFI Directions – August 2012

By Prabal Goel, IFMR Capital

On August 03, 2012, RBI came out with its ‘Non Banking Financial Company-Micro Finance Institutions’ (NBFC-MFIs) – Directions – Modifications1 via which RBI has made changes to Directions issued on December 02, 2011 in light of representations received by it from NBFCs functioning in the microfinance sector. Let us look at the important provisions of the directions.

A procedural requirement introduced by the Directions is that to function as an NBFC-MFI, an NBFC must now seek registration with Reserve Bank of India as an NBFC-MFI. Failing this, an NBFC shall not be capable of advancing more than 10% of its assets to the Microfinance sector and shall not be treated as an NBFC-MFI. This change in classification shall be recorded in the Certificate of Registration of the NBFC. The last date for the application of registration is October 31, 2012.

In a move sure to bring relief to the NBFCs functioning in the sector in the country, Reserve Bank of India has decided to relax the criteria regarding the Qualifying Assets to some extent. As per the changes introduced, the assets existing on the January 1, 2012, whether or not they fall within the compass of “Qualifying Assets” as defined in the Master circular on NBFC-MFI2 , shall be taken into consideration in calculating the ratio of Qualifying Assets to the net assets. The aggregate amount of loans that an NBFC-MFI may extend for income generation activities may not be less than 70% of the total loans extended by NBFC-MFI. Earlier, the floor was 75%. Thus, a modicum of relaxation has also been introduced at this level, as the ground realities have been recognised that the target clientele of microcredit being at subsistence level, their basic human requirements cannot be overlooked. On multiple lending, RBI has clarified that a person who borrows as an individual cannot thereafter borrow from an NBFC-MFI as member of an SHG or JLG. Again, the same SHG/JLG/individual cannot borrow from more than 2 MFIs.

NBFC-MFIs have also been directed to be members of at least one credit information company and to provide them with timely and accurate data and use the data available with them to ensure compliance with the conditions regarding membership of SHG/ JLG, level of indebtedness and sources of borrowing. As a safety measure to avoid concentration in specific geographical locations, NBFC-MFIs may approach their Boards. All NBFC-MFIs have also been directed to become member of at least one Self-Regulatory Organization (SRO) recognized by the Reserve Bank of India.

The Directions introduce flexibility in terms of pricing individual loans. Earlier, the interest rate cap on individual loans given by MFIs was fixed at 26% and the margin at 12%. Post these directions, the average interest rate on the loans is still limited to the sum of average borrowing costs plus margin or 26%, whichever is lower but the interest rate on individual loans given by MFIs may be more than 26%. Also, the caps on margin have been revised to 10% for large MFIs (loans portfolios exceeding Rs.100 crores). The maximum variance permitted for individual loans between the minimum and maximum interest rate cannot exceed 4 per cent. The average interest paid on borrowings and charged by the MFI are to be calculated on average monthly balances of outstanding borrowings and loan portfolio respectively.

The Directions also recognise the problems faced by MFIs with respect to loans originated in Andhra Pradesh. With regard to the portfolio in Andhra Pradesh, NBFC-MFIs have been directed to ensure that the provisioning made towards the portfolio in Andhra Pradesh should be as per the current provisioning norms. For the purpose of calculation of Capital to Risk Weighted Assets Ratio(CRAR), however, the provisioning made towards portfolio in Andhra Pradesh shall be notionally reckoned as part of Net Owned Funds and there shall be progressive reduction in such recognition of the provisions for AP portfolio equally over a period of 5 years. No write-back or phased provisioning is permissible. As far as portfolio in other states is concerned, the provisioning will be as per the December 2, 2011 circular3 , with effect from April 1, 2013.

There has been a mixed response in the Microfinance sector to the Directions. While the directions relating to reduction in margin cap for larger MFIs have been criticised, the operational clarifications concerning MFIs being part of at least one Credit Information Company and at least one Self-Regulatory Organization (SRO) which is recognized by the Reserve Bank of India have been welcomed.4

1 – DNBS (PD) CC.No.300 /03.10.038/2012-13
2 – DNBS.(PD)CC.No.293/03.10.38/2012-13
3 – DNBS.CC.PD.No. 250/03.10.01/2011-12
4 – “RBI relaxes NBFC-MFI rules: Positives and negatives”, http://www.moneycontrol.com/news/business/rbi-relaxes-nbfc-mfi-rules-positivesnegatives_740629.html ( last visited on August 10,2012)


Notes from the IFMR Capital Partners Meet

On November 22nd and 23rd, IFMR Capital held its first partners meet, a two day meet with all its partners to re-envision access to finance for institutions that impact low income households. Industry participants and researchers came together to discuss a broader vision for the industry. While the two day event saw active participation and debate on issues that currently concern the sector, the emphasis of the meet was largely on the way forward. Held at a critical juncture, participants brainstormed and discussed strategies for reshaping the sector towards a shared vision.

The meet followed the appreciative inquiry format and drew out the best from the participants. The first part was designed to shift the focus of participants from being short-term reactive to long-term proactive. The second part focused on the positives of the industry and on what was valuable about the way the sector has functioned in the past. The participants broke into groups of two and interviewed each other. Each person described their high points and success stories, sharing instances of how and why being in this sector made them feel glad they belonged here.

The third part of the approach sought to use the output from the interviews to get a clear sense of what were the most important factors that contributed to the success in the sector. Later, organised in groups of six, participants worked on a vision of what the sector would be like in five years if the root causes of success were leveraged in specific areas of focus such as governance, customer focus, risk management, product development, etc. The end result was a shared vision that institutions in the sector could look up to.

Some important questions that emerged during the meet are listed below:

  1. How should we position MFIs so that they become an indispensable part of the financial system?
  2. How do we engage with the political groups more effectively?
  3. What are the unique and additional responsibilities of MFI boards, given that they deal with a segment that is financially and otherwise excluded?
  4. As a sector, what data do we need to collect and disseminate, internally and externally, to enable holistic risk management?
  5. What investments in training will organizations and the industry make in:
    • Moving from mono-line to a multi product model
    • Ensuring common minimum values are shared across the sector
    • Taking on the new role of a financial advisor
  6. How do we use technology or other disruptive methods to dramatically improve operating efficiencies?
  7. What is the regulatory framework which will allow MFIs to flourish and serve a wider range of financial needs?
  8. How do we resolve short-term funding & liquidity issues for the sector?

In the last part of the meet, the groups focused on developing tactical strategies on four areas : brand management, product development, political engagement and ensuring common minimum values, areas that needed immediate action to take the industry from where it is today to where the group would like to see it in the future.

Here is a brief summary of the themes that emerged from the meet.

a) Customer centric approach: The MFI industry’s main strength is its ability to reach out to and serve a vast number of clients. Client engagement is continuous and services provided are valuable. There was a clear consensus that going forward this customer centric approach must continue to be of key importance.

b) Innovation: Every growing sector continuously evolves. Institutions must be able to respond to the changes in the sector. The need is for an innovative and flexible approach which ensures sustainability and works in the interest of its end customers. The idea of MFIs offering multi-products was discussed at length. This was the way forward and MFIs must invest time, effort and capital towards this. MFIs already possess large amounts of granular financial data pertaining to their clients. This could help them understand the needs and capacities of their clients better and in turn aid the design of relevant financial products.

c) Operating efficiencies: The cost to serve low income households can potentially be dramatically reduced by disruptive innovations. Key pieces of infrastructure such as the UID have the potential of making KYC a public good. Enormous strides in technology such as the use of biometric identification, automated payment systems, mobile technology with improved authentication through the UID can also ensure that local branch staff leverages technology to perform their most repetitive day-to-day tasks, freeing up their time to perform their core duty of understanding the needs of clients and recommending appropriate solutions. There was a clear consensus that business models need to evolve and leverage such innovations.

d) Importance of the mission: While sustainability of business was crucial, it was agreed that the commitment to social and economic well-being of the client was crucial to the sector. Given the profile of the average client, MFIs perform the important role of giving access to finance to the most excluded segment of society. Going forward, organizations must not lose sight of this fact. Further, it is necessary that there is an alignment of objectives and vision across the entire company.

e) Positioning of the industry: Concerns were raised about the response of the industry to the recent crisis and the lack of a unified voice. The role of the board was stressed in this respect, many felt that the board should play a role in ensuring customer metrics are tracked continuously and senior management is held accountable to performance as measured against the metrics. This would also ensure that MFIs are collecting enough information during good times as well as bad, so an accurate picture can be presented to the media, investors and regulators.

f) Holistic risk management: The current business model of organisations in the inclusive finance sector is strong on operations and therefore manages operations related risks very well. However, in order to evolve into universal financial service providers, organisations need to focus on risk in a more holistic manner, ie look at all aspects of risk such as operational risk, credit risk, interest rate risk, liquidity risk, political and regulatory risk. Capacities need to be built internally, for instance, risk departments need to be set up, people need to be hired and adequate training needs to be provided, investment needs to be made in risk management systems. However, it was agreed that senior management buy-in was critical to the implementation of “holistic risk management”.


Technology to the rescue of MFIs

– By Sameer Segal, Founder & CEO, Artoo

[Artoo Slate is a software solution designed for microfinance field staff that takes the entire process of data collection and loan disbursement online. Sameer has been recognized as one of Asia-Pacific’s most promising young social entrepreneurs by the Paragon100 Fellowship. He holds a B Tech from the National Institute of Technology, Karnataka and is a StartingBloc Fellow (MIT Sloan). His passion is inclusive technology, something he discovered during his internship with Ujjivan. He, along with Co-founder of Artoo, Indus Chadha, has developed Artoo Slate which helps microfinance companies cut down on operation costs. He shares with us in this guest blog, how technology can make a difference to microbanking institutions that cater to the bottom of the pyramid.]

The Malegam Report is finally here. At first glance, we were all glad to see how well balanced it appeared. But now we have to begin to make sense of the constraints that it places on MFIs in the short term. In the words of Vijay Mahajan of BASIX: “some provisions are so severe that some MFIs will be facing death by April”.

Indeed, most MFIs must be grappling at the moment with what changes they will need to make to stay alive.

If MFIs need to reduce costs, remove redundancies, and improve efficiencies at all levels, they need to centralize their operations. Centralizing will also help MFIs ensure the quality of the customers they acquire and thereby reduce risks. To centralize operations and still maintain competitive TATs for all customer-centric activities (e.g. customer acquisition, loan disbursement, and repayments) is the hardest part of the puzzle that needs to be cracked. It will be only possible for MFIs to consolidate branches and have their field agents operate over larger geographies (improving borrower to employee ratio) when they can monitor and remotely manage their staff and activities. For that they need technology. 

We believe, however, that this needn’t be a question of the survival of the fittest. It could serve as an opportunity for visionary MFIs, regardless of their size and strength, to re-imagine their operations in a way that, while respecting the RBI’s imminent mandates, dramatically reduces their Operating Expense Ratio (OER) and enables them to remain profitable and survive in the face of the Malegam Report.

At Artoo, we wish to catalyze development through inclusive technology and empowering communication. Our software framework, Artoo Slate, can help MFIs bring down their OERs to meet the RBI’s requirements in a timely manner while enabling them to remain profitable. We believe it has the potential to help MFIs become more productive in helping their customers rise out of poverty. Here’s our take on what the Malegam Report is asking MFIs to do and how we might be able to help.


 Artoo Slate is a software solution that takes the entire process of data collection (under 18 minutes for complete customer acquisition process*) and loan disbursement online (70+% of Loan Applications can be processed in the field on the same day*). It will capture rich data from the field, do away with the back and forth of paper, avoid innumerable delays (reduction in turn-around-time (TAT) from 3+ days to 1 hour*), and drastically reduce expenses (courier, Document Management System Hubs & outsourced data entry). It will allow for easy exchange of data between field staff and backend systems (CBS/MIS) in a way that will reduce time spent (41% of center meetings take under 1 min to update paper work) on customer query clarification and identification and resolution of errors in customer profile and loan application forms. Even while the credit bureau is stabilizing, it will enable MFIs to implement a field credit check upfront for renewal loans based on internal data and assessment. 


Our framework enables field agents to operate remotely and helps distributed MFIs to centralize their operations, while improving their TAT for all customer-centric activities. MFIs can monitor their business on a real time basis: pick up on trends (mass default, political/economic turbulence) as and when they happen directly from the field (defaulter information available instantaneously as compared to 10-15 days lag in previous implementation*). In addition, MFIs can track their social performance on a daily basis.

It is an intuitive interface that has been designed keeping in mind field staff’s educational training and exposure to technology. It will also serve as platform through which MFIs can train (e.g. basic English skills, computer skills, updates on new products and offerings) their field staff on-the-go and monitor them on a real time basis to improve their overall service quality. MFIs can improve their field agent quality and build their capacity, reducing their attrition to short-term focused aggressive competitors.


Artoo Slate, in the hands of the field agent, promises to be a scalable way for the MFI to engage more effectively with their end customers through videos, graphics, and other interactive media (imparting life skills, financial planning, healthcare information, conversational English, etc.) Engaging with the end customer will not only give them a reason to attend center meetings but also allow them to recognize their MFI as a real partner in their struggle to climb out of poverty, giving forward-thinking MFIs an opportunity to differentiate themselves, improving customer loyalty and therefore profitability.


We have been really lucky to pilot our solution, Artoo Slate, at Ujjivan microfinance, and are happy to share the interim results of our pilot here. The pilot covers a branch in urban Bangalore and includes processes of customer acquisition, collections, branch transactions, and field agent training.


Where is the Ponzi scheme?

We have recently read comments on various blogs which suggest that MFIs are comparable to Ponzi schemes. These bloggers suggest that once new MFI loan disbursements slow down, borrowers will not be able to make the payments on their old loans.

We would like to present data from some of our partner organisations operating across India which soundly refutes this notion.

Out of 13 MFIs whose data has been shared here, only one operates in Andhra Pradesh.

In the following table the data on the collection rate is split into before and after the Andhra Pradesh Ordinance came into effect.  As one can see collections rates remain above 99% despite the fact that many MFIs have significantly cut disbursements.