Making Micro-Finance Associations More Effective as Self-Regulatory Organisations: Lessons From The Indian Experience

Ramesh S Arunachalam

Rural Finance Practitioner

A lot of questions have been raised about the effectiveness of micro-finance associations as Self-Regulatory Organisations (SROs). While it is true that these associations may have tried hard, the fact of the matter is that this self-regulation has not worked and here are some reasons why. It would useful for the RBI and The Malegam Committee to look at some of these aspects and address them, as the Malegam Committee Report (MCR) does provide a fairly important role for micro-finance associations as SROs. The various reasons are briefly highlighted below:

(1)   To be effective, MF associations that act as SROs must have a common set of public policy objectives including the enhancement of market integrity, market efficiency and client/investor protection with regard to micro-finance;

(2)   They must be actively supervised by government regulators and in the present instance by RBI, IRDA and other such regulators;

(3)   They must have (official) statutory regulatory authority and/or authority delegated by the government regulator(s). This would give them the much-required legitimacy and this is a very critical aspect because, then the SROs will act (on behalf of the government regulators and also) along with them in maintaining decorum and order in the micro-finance industry

(4)   They must establish simple and practical rules for MFIs and individuals to follow and this must be subject to their official regulatory authority and it should also be in line with the objectives in the larger regulatory framework;

(5)   They should monitor compliance with these rules, without any conflict of interest and irrespective of whether the member MFI is a pioneer, founder, largest MFI and the like;

(6)   They must have the official authority and more importantly, administrative will to discipline MFIs and individuals that violate these rules. Clearly they must show intent to self regulate rather than provide a lip service;

(7)   While they should have industry representatives on their Boards and also ensure that industry representatives have a meaningful role in governance, the board must have the equivalent of independent directors from civil society and/or official regulators. That alone will make them more accountable; and

(8)   They must maintain structures, policies and procedures intended to ensure that all conflicts of interest between their membership (commercial) and regulatory activities are appropriately managed.

Along with the core characteristics outlined above, MF association SROs also need to carry out a variety of other activities that are consistent with their mandate to enhance market integrity, market efficiency and client/investor protection. These activities would need to include the provision of: (1) Consumer redressal services for the end user clients; (2) Dispute resolution services for and among their members; (3) Client literacy and education for end user clients as well as educational services for staff of their members in special areas like gender etc; and (4) Reliable and valid market data for their members and other market participants.

Within the above broad continuum of services and characteristics, MF associations as SROs can then start to occupy a unique position and play an important role, using their official regulatory authority as well as their special relationships with government regulators and their members. I hope that the RBI and Malegam Committee look at this aspect closely and work out the relevant details…

Have a nice day!