The Reserve Bank of India (RBI) has decided to recognise industry associations of non-banking financial companies engaged in microfinance (NBFC-MFIs) as self-regulatory organisations. The central bank has said this will ensure effective monitoring of NBFC-MFIs, their compliance with regulations and the code of conduct and aid the customers of NBFC-MFIs. Earlier, RBI had appointed a sub-committee of its central board of directors under the chairmanship of Y H Malegam to study issues and concerns in the microfinance sector, as far as entities regulated by RBI were concerned. One of the suggestions of the committee pertained to industry associations assuming greater responsibility in ensuring compliance with regulations by NBFC-MFIs. The broad framework of regulations recommended by the committee, including putting in place a self regulatory structure for the sector, was accepted by RBI and a detailed regulatory framework for NBFC-MFIs was put in place in December 2, 2011.
The directions stated separate guidelines would be issued on the role of industry associations in the overall monitoring of the microfinance sector. A self-regulatory organisation recognised by will have to adhere to a set of functions and responsibilities such as formulating and administering a code of conduct recognised by the bank, a grievance and dispute redressal mechanism for clients, ensuring borrower protection and education, monitoring compliance by NBFC-MFIs with the regulatory framework put in place by RBI, surveillance of the microfinance sector, training and awareness programmes for members, self-help groups, etc, and submission of financial data, including annual report, to RBI. Alok Prasad, chief executive of Micro Finance Institutions Network (MFIN), said the industry body had been structured as a self-regulatory organisation (de facto status), and it had come out with a code of conduct and an ecosystem for credit bureaus. Now, MFIN will apply to RBI for formal recognition as a self-regulatory organisation. MFIN has 44 NBFC-MFIs as members, with a balance-sheet size of Rs 25,000 crore. For a self-regulatory organisation in this space, at least a third of the NBFC-MFIs should be registered as its members, at the time of recognition. Besides that, it should have adequate capital to discharge its functions without being substantially dependent on subscription from members.