Ramesh S Arunachalam
Rural Finance Practitioner
The Malegam Committee Report (MCR), if accepted as it is by the RBI, has a significant role for SROs (and in the present case, for the Industry Associations) and media reports strongly suggest that the proposals of the MCR may come into force from April 2011. While using SROs (Industry Associations) may seem as a practical step, especially given the scope and scale of supervision required in micro-finance in India, the fact that these industry associations were not even able to implement their respective codes of conduct over the last few years needs to be clearly recognized. And more importantly, this critical aspect must be suitably addressed, in case the RBI is going to rely on the use of industry associations as SROs, in the overall micro-finance regulatory framework.
Here are some suggestions in this regard for the RBI, based on good practices and lessons from global experiences…for what they are worth and what they are not…Read on…
The primary regulator (whoever it is) must have an appropriate oversight program for the SRO/Industry association and thereby ensure that:
· The SRO has appropriate corporate governance policies and procedures and that it follows them in practice. This is very critical as many institutions have great governance policies and procedures on paper but rarely follow them in implementation.
· The SRO’s functions and rules cover its regulation/supervision responsibilities and are fair and balanced.
· The SRO’s regulation, supervision and risk management responsibilities have been met, including that its systems and processes meet appropriate standards. The regulator must also ensure that the SRO has effective compliance, supervision and enforcement programs.
· Any identified conflicts of interest, within the SRO, have been squarely and appropriately addressed. This is a very critical aspect as there have been huge conflicts of interest in the Indian micro-finance sector and this is one of the main reasons for the Sa-Dhan and MFIN codes of conduct not having been implemented on the ground.
· Shortcomings or needs that require a response from the SRO are identified and adequately addressed periodically.
In addition, the regulator, through appropriate supervision, must ensure that the SRO continues to meet all the conditions of its license[i] and other obligations imposed on it by law and/or regulation. Some of the main processes that regulators could use in these oversight programs with SROs/industry associations are given below:
Process # 1: Review Corporate Governance Standards in SRO
1. Ensure that the SRO meets high standards of corporate governance required for being a part of the overall regulatory system and this would include consideration of all aspects including functioning of board of directors (or equivalent), their independence and the like
2. Ensure that the SRO is responsive to all stakeholders including clients and also meets its public interest/civil society mandate in terms of transparency and disclosure
3. Ensure compliance and consistency with the law and conditions of license.
4. Ensure that the SRO’s internal functioning and management systems are consistent with its regulatory mandate and objectives and with overall regulations.
5. Ensure that SRO rules and processes are fair and balanced, having regard to the interests of all stakeholders and most importantly, that of clients
Process # 2: Periodically Monitor The SRO and Its Reports
1. Periodic review of the status of SRO’s monitoring and other programs, activities, and financial condition, as well as current regulatory matters.
2. Provide ongoing supervision and practical advice, to ensure that the SRO is able to discharge its functions effectively. This is especially critical because the industry associations in India have not had any such regulatory/supervisory experience
3. Help in coordination of activities with an SRO, as may be required
Process # 3: Enable Self-Assessment of its Own Performance and Operations by the SRO
· Independently review SRO performance in line with its supervisory and related duties
· Provide input to the SRO and enable it to develop its (own) targeted examination of its performance with regard to supervisory and other duties.
· Help the SRO establish an objective process of self-evaluation and related measures for assessing its performance.
· Identify areas of risk in SRO’s operations and suggest strategies for improvement with regard to the same
· And finally ensure that the SRO itself has a code of conduct that it follows in its own functioning. This is very critical and it has often been a major reason for (industry associations) not being able to enforce their codes of conduct with their respective members
The larger point I am making is that, given that the Malegam Committee Report (MCR) has provided for some level of self-regulation in micro-finance in India, let us try and ensure that there are core criteria to make this self-regulation work and work well. When effective, self-regulation, offers benefits to industry and consumers, but it must be consistent with the overall regulatory framework and accountability must be strong. In fact, accountability is most critical in this context and having good regulatory outcomes, whether legislated or self-regulatory or a combination of both, depends on the government, micro-finance industry, various stakeholders and clients being prepared to become accountable in the overall regulatory structure and framework. Unless this accountability is built into the system, no amount of regulation will help the beleaguered Indian micro-finance industry…
Have A Nice Day!