Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Sunday, March 20, 2016

(Digital) Financial Inclusion and Microfinance: The Need for An Independent Client Protection Agency! (PART 1)

Ramesh S Arunachalam

Financial inclusion and digital financial inclusion are the new buzz words in the financial sector industry. Indeed there has been a lot of innovation in the area of financial inclusion and digital financial inclusion and the number of products on offer as well as the stakeholders who have deliver these products have increased significantly - both of which have contributed to immensely enhancing the complexity of financial inclusion and digital financial inclusion products and services. So, it’s naturally follows that protection of the end user clients - of financial inclusion and digital financial inclusion products and services - becomes very necessary. There can be no two doubts about that!

Now if you look at financial inclusion, traditionally, the suppliers of these products/services have been MFIs, banks and other institutions, some of which are regulated and supervised and others are not. Thus, while some of these institutions come under the purview of the central bank, others do not. However, when digital financial inclusion services come into play, service providers typically include TELCOS and a whole range of merchants, agents and intermediaries. Technically, while these stakeholders come under RBI REGULATIONS in India, their supervision is most certainly not as it SHOULD be, especially from a client protection perspective. Therefore, for both financial inclusion and digital financial inclusion services, it would be appropriate to argue that, at best, client protection services and client redressal mechanisms are at their infancy.

This is because if you look at central banks (like the Reserve Bank in India), especially in large diverse countries like India, even for the fewer institutions that they regulate/supervise, they don’t have the wherewithal to provide dispersed, decentralised and grass-roots level client redressal mechanisms and client protection services, which is very much required for low-income and bottom of pyramid (BoP) clients. And mere delegation of supervision and client protection issues to SELF-REGULATORY ORGANIZATONS (SROs) does not and will not work as self-regulation is an oxy-moron. Member controlled SROs cannot self-regulate and we have innumerable examples over the last 11 years, since the Krishna district crisis of 2005.

That being the case, the only feasible option is for clients to approach the banking ombudsman and use other existing mechanisms.  However, the transactions costs associated with going to a banking ombudsman can be huge and prohibitive for the low income and BoP clients. I am saying this with strong conviction because even somebody like me who is educated and “tech savvy” and belongs to what we call as the middle class (in an economic sense in India) found it very difficult to approach the banking ombudsman. Believe me when I say it is indeed very difficult to reach the banking ombudsman. I did try some years ago and in fact, I needed all kinds of references before I could even get an official audience with the regional director of RBI, who also happened to be the banking ombudsman in my area! So, not to sound like a broken record but low income and BoP clients will almost find it impossible to reach the banking ombudsman...let us be absolutely clear on that aspect...

And then of course you have other frameworks that attempt to protect the end user customers like the customer protection act or the outdated MRTP or the competition commission which has replaced MRTP and so on[1]. Accessing these is also extremely difficult, even for a person like me. I am therefore certain that low-income and BoP clients will find it extremely difficult to access these bodies and avail their services. Thus, the larger point that I am trying to make is the huge difficulty that low income and/or BoP clients face in accessing currently available client redressal mechanisms, whether be it the banking ombudsman scheme and/or other alternatives that presently exist.

The sum and substance of my argument is that low income and/or BoP clients - like the ones I have reported about from eastern UP, Bihar and Madhya Pradesh and similar places - face huge hurdles in reaching out to concerned people who POSSESS the executive powers to take action against those financial inclusion/digital financial inclusion stakeholders, who, may have violated consumer protection norms and guidelines in the first place.

Another aspect that has to be kept at mind is that India is a great country for legislative enactment and framing of rules and regulations but when it comes to actual implementation of laws/regulations/rules in real time, the record is rather poor. And implementation of laws/regulations/rules gets poorer and weaker, the more distant and remote the place is - like for example, eastern UP, Bihar and Madhya Pradesh. So, when you are talking of remote districts in Eastern UP, Bihar and Madhya Pradesh (and similar places) which are now experiencing burgeoning growth of (digital) financial inclusion services and where huge violations of client rights are taking place, the question that arises is “How do clients living in these areas protect themselves and how can they access client redressal mechanisms easily and quickly?”

And as it stands, the truth of the matter is that it is going to be very, very difficult for the Reserve Bank of India or any present regulator to even know the client protection violations that are happening on the ground. And unless they are aware that violations are occurring and the specific nature of these violations, they will not be able to regulate because I think the ability of low-income or bottom of pyramid clients to bring client protection issues back to the regulator (sitting in a faraway place and/or even state capital) is almost next to impossible. And there is of course, the issue of intimidation that these low income and BoP clients face for various reasons, because of which they are less likely to approach a far away located regulator.

So I think the case for having an INDEPENDENT client protection regulator (with a deeply entrenched grass-roots network) becomes very strong. With all due respect, I think that the Reserve Bank of India should regulate financial institutions with regard to prudential and non prudential norms and also look at institutional/organisational issues and other aspects. However, when it comes to the issue of client protection, just as it happened in the case of 2010 Andhra Pradesh microfinance crisis, somebody else will have to take charge of that. In (erstwhile) Andhra Pradesh in 2010, it was the state government which took on client protection because there was no such (national client protection) agency available. However, I feel that a state government taking on the client protection role is certainly not the most desirable option, just as we saw in (erstwhile) Andhra Pradesh where the state government intervention led to chaos on the ground and ultimately, turned out to be counter-productive.

So I think client protection requires a new PAN India independent agency (regulator) with a strong grass-roots presence. And it must be an agency which is neither involved in the development of (digital) financial inclusion and microfinance nor concerned with regulating other aspects of these (digital) financial inclusion/microfinance stakeholders. In other words, this client protection agency (regulator) should have a single minded focus on customer protection and look at everything from the perspective of the end user clients with regard to (digital) financial inclusion/microfinance. This single minded focus is required and only then will this regulator be able to do justice and ensure client protection at the grass-roots, which has far ranging and far reaching consequences for the (digital) financial inclusion and microfinance industry in the long-term!

Will that happen in India anytime soon? Your guess is as good as mine and this is a question that time only can answer...

Have a great start into the week!

[1] Then you have draft proposals like in the Financial Sector Legislative Reforms Commission, which I am sure will not see the light of the day, anywhere in the near future!

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