Ramesh S Arunachalam
Rural Finance Practitioner
The need for consumer protection in micro-finance arises from a huge imbalance of power, information and resources between consumers and MFIs, with low-income consumers at a great disadvantage. Some specific aspects that contribute to these imbalances are given below:
· While MFIs/FIs know their products rather well, the individual low income consumer often finds it difficult and/or costly to obtain sufficient and transparent information regarding the various financial products that they access from MFIs.
· In addition, many of the low income people find MFI financial products naturally complex and/or difficult to assess, even when all relevant information is disclosed.
Imbalances also occur because the entry or exit costs are low for many MFIs, thus allowing (disreputable or fly by night operator) firms to emerge, exploit low income people and vanish. Please recall that industry stalwarts like Mr Vijay Mahajan and others (like Mr Alok Prasad) have often mentioned unregistered fly by night operators as mainly responsible for the present (2010) as well as previous (2005/6) AP micro-finance crisis
Therefore, it is imperative to have consumer protection legislation to help address this (natural) market failure caused by these huge imbalances of power, information and resources. And any such consumer protection law (legislation) for micro-finance should provide clear (non-ambiguous) consumer protection rules regarding the various financial products and services delivered by MFIs/FIs to micro-finance clients.
For this, it must clearly define the scope of micro-finance appropriately and also specify the product and client characteristics apart from specifying models of delivery/institutions and the like. This is very critical and without identifying the scope of micro-finance, neither can products, delivery models, institutions, clients and other aspects be highlighted and therefore, clear-cut (consumer protection) rules cannot be framed
This law must also try to ensure client protection from two perspectives: a) From a product design view point as financial products are services consumed by the client and require their active participation in the production; b) From services delivery perspective as much customer insensitivity can stem from the delivery/institutional model and related aspects.
Last but not the least, the necessary institutional arrangements should be in place to ensure thorough, objective, timely and fair implementation and enforcement of the consumer protection rules. This is a very vital aspect because much of micro-finance is delivered through a dispersed and decentralized model and therefore, institutions tasked with the objective of implementing the consumer protection law must have the wherewithal and resources (physical, managerial and financial) to actually implement the consumer protection law/rules. Otherwise, any consumer protection legislation will also turn out to be as ineffective as the current codes of conduct (regulatory or voluntary), prevalent in Indian micro-finance…
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