Ramesh S Arunachalam
Rural Finance Practitioner
Just after the last Krishna crisis (2005/6), I heard a lot of micro-finance industry stalwarts arguing that codes of conduct along with competition will ensure protection of low income consumers. However, as the events of the last few years have shown, that has not sadly happened. Two aspects are noteworthy here: (1) Neither has competition between MFIs been able to fully address consumer protection issues on their own; and (2) Nor have codes of conduct for responsible lending (often cited substitute for regulation) been able to improve the business practices of MFIs.
As far as I have seen, in many competitive markets, competition may have been sufficient to ensure that firms succeed by providing consumers with a flood of products and services but practices surrounding the delivery/distribution of these products including access to transparent information has always been under question. Therefore, much more than competition is required to ensure efficient and fair markets and the same applies to micro-finance services for low income people.
Likewise, while codes of conduct were meant to encourage MFIs to follow ethical standards in the treatment of their customers, there are no real substitutes for adequate regulation intended to protect the interests of consumers of micro-finance services. And in the Indian micro-finance sector, self-regulation through such voluntary codes of conduct has been less than effective since institutional capacities of industry associations (MFIN or Sa-Dhan) have often been limited, micro-finance markets are highly concentrated and dominated by a small number of MFIs, the legal framework for micro-finance services is underdeveloped, and available the laws and regulations (like RBI code of conduct for NBFCs) are frequently not effectively applied or enforced. In fact, when the code of conduct was first introduced in 2006, I had a very open mind and felt that it may provide a useful first step, particularly if the regulator (or supervisor) oversees the codes and reports on the effectiveness of the codes. However, that did not happen and it is clear that codes are not sufficient to improve business practices of MFIs and hence, it is imperative for the regulator/government to consider introducing special consumer protection legislation for micro-finance.
The focus of such consumer protection must be on the relationship and interaction between a low income customer and MFI/equivalent delivering similar services. Among other things, such legislation should ensure that MFIs provide low income people (consumers) with:
Ø Transparent Information - by providing full, plain, adequate and comparable information about the prices, terms and conditions (and inherent risks, if any for the new savings and mutual fund type products) of various Micro-Finance (MF) products and services;
Ø Choice of Products and Services - by ensuring fair, non-fraudulent, non-coercive, legally valid and responsible/reasonable practices in the selling, advertising and marketing of Micro-Finance (MF) products and services, and collection of payments etc;
Ø Appropriate Redressal Mechanisms - by providing inexpensive and speedy mechanisms to address complaints and resolve disputes in fair and transparent manner and especially at the local level; and
Ø Privacy Aspects - by ensuring control over access to personal financial information and its non-use for other (not-so-legal) purposes
In addition, the legislation should also ensure that low income people/consumers have access to programs of financial education that enable them to develop the financial capability and capacity required to understand Micro-Finance (MF) products and services and exercise their rights (and responsibilities) as financial consumers. Such training in financial issues should serve to empower low income people to make wise and informed decisions about their household finances including access to various financial services from various stakeholders and also to plan their financial needs over a lifetime.
However, as the Indian micro-finance experience has clearly shown, financial education and literacy[1] alone cannot, be a substitute for adequate financial consumer protection regulation. While they can help reduce the information and power imbalance of low income consumers with regard to MFIs/FIs that deliver various services, they can do so only to an extent - as they form only a part of the much wider intervention of consumer protection, which needs to be mandated through appropriate legislation. In fact, clear consumer protection legislation for micro-finance is required as Micro-Finance (MF) markets will not work on their own and one needs institutions to regulate and stablise these markets, compensate to losers and provide the safety nets – thus, Micro-Finance (MF) markets can neither be legitimate or, for that matter, efficient, if you don’t have the appropriate regulatory frameworks. And several stakeholders have suggested, the prime justification for regulating financial markets like in micro-finance stems from the need to protect low income people from fraud and misrepresentation, unfair treatment, insufficient information, coercive employees of MFIs, and other things (including the loss of their investments)
Thus, while expanding access to financial services is very critical and is in many ways a fundamental right of citizens in a developing country like India, to help grow the economy in an inclusive manner, both MFIs (as financial institutions) and low income people (as financial consumers) need to be responsible in their use of financial services. That, in a nut shell should be the objective as well as result of any consumer protection and accompanying micro-finance legislation…
[1] I plan to post separately on financial literacy and education from a customer protection perspective.
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