MFIs – Malegam Report ………..(4)

Today’s  issue covers Credit Information Bureau and Coercive methods of recovery

Credit Information Bureau

As mentioned in the previous issue, MFIs need to be made responsible for curbing multiple-lending. For this it is essential that a data-base is available which provides information about the existing outstanding loan/s of a borrower, as well as the composition of existing SHGs and JLGs.

Micro Finance Institution Network (MFIN) formed in Nov’09 is an industry association which has almost membership of 50 organisations, constituting 80% of the MFI industry. Sa-Dhan is an association of community development finance institutions which also includes MFIs within its members. Both these institutions are in the process of building a Credit Information Bureau with requisite systems, whereby MFIs can report all the necessary information. It may be added that function of the proposed bureau would not be to determine the credit-worthiness of the borrowers.

Recommendations

§          One or more Credit Information Bureau be established and all MFIs be required to become members of the same.

§          In the meantime, MFIs individually will be responsible to ascertain existing borrowings from the borrowers.

Coercive Methods of Recovery

Issue of coercive recovery is linked to multiple/over lending as well as recruitment of untrained staff as well as remuneration structure of MFIs recovery agents (which is often based on recovery rates). Ultimately MFIs have to ensure that coercive recovery does not take place and hence any instances of coercive recovery determined, should result in severe penalties on them. In this regard one could learn from experiences of banks in respect of their retail portfolio which also faced similar situations in past. There should be an ombudsman like structure, which borrowers can approach for their grievance Redressal. These ombudsmen should be located within easy reach of borrower.

AP Micro Finance Institutions (Regulations of Money Lending) Act 2010 includes a list of actions which constitute ‘coercive action’. This includes ‘frequenting the house or other place where such person resides or works, or carries on business’. It also provides that all repayments shall be made by the SHG or its members at the office of the Gram Panchayat or at a public place designated by the District Collector. However committee is of the view, that a collection place which is far off from the borrower’s residence would result in additional burden to the borrower.

Recommendations

§          MFIs will be responsible to ensure that coercive methods of recovery are not used and if used management of MFIs should be severely penalised.

§          Regulator will monitor if MFIs have proper code of conduct / training of their employees to ensure no such coercive methods are used.

§          All recoveries be made at the Group level at a designated central place.

§          Each MFI must establish a proper Grievance Redressal Procedure.

§          RBI to recommend an appropriate mechanism to the lead banks on the lines of Independent Ombudsman.

…………to be cont’d

Please do initiate your comments / queries to further broaden the understanding of the developments in the sector.