Having more than one SRO is good for business: Sa-dhan CEO Jiji Mammen

Sa-dhan is the oldest body for micro-finance institutions, and the second self-regulatory body for the industry. Its latest quarterly report shows that at end-June, the microcredit book of 232 lenders (members) was Rs 2.76 trillion — a growth of 5 per cent over the previous quarter — but an annual increase of 24 per cent. JIJI MAMMEN, Sa-dhan’s executive director and chief executive officer, spoke with Raghu Mohan. Edited excerpts:

Why is there still no uniformity in reporting data to the credit bureaus by microfinance players, despite everyone talking of its merits?

I feel reporting credit histories to bureaus has to be done on a weekly basis, if not on a fortnightly basis, as otherwise you will not get the correct systemic picture. Micro-finance institutions (MFIs) find it a little more difficult to upload the data, but in spite of this they do it on a fortnightly basis. Banks will also eventually come into it because their systems are aligned, and they can easily upload the data. If you were to look at the recent guidelines for digital lending by fintechs, the central bank has clearly talked about reporting to credit bureaus on a regular basis.

The Reserve Bank of India (RBI) has hiked the qualifying household income level for MFI loans up to Rs 300,000 per annum to widen the scope of eligible borrowers. Is this going to be static for some time to come?

As I understand from the RBI, for the time being they are going to continue with the Rs 300,000 level. It’s not indexed to inflation, or to other indices. They might take a look at it after a year or two based on the feedback. When these guidelines were first flagged in a discussion paper, the threshold was lower. And you had two thresholds — up to Rs 150,000 for rural customers, and up to Rs 200,000 for those in the urban areas. But, after a lot of discussion in which Sa-Dhan played a major role, we were able to convince the RBI to bring in a uniform threshold of Rs 300,000.

There’s a view that peer-to-peer (P2P) lenders must be allowed to get into secured lending, as part of the effort to diversify their risks. Will this not overlap with MFIs’ business at a certain level?

It will definitely overlap. Even fintechs work in the same area as MFIs, especially in the urban areas. That said, I don’t think P2P or fintech lending has gone into the rural areas. Most of it is happening in the urban and semi-urban areas. I would only say, the more the merrier when it comes to overlaps — if people get to borrow from P2P and other lenders, it is fine. I don’t think there’s any shortage of clientele given the vastness of the country and the large number of people who are below the threshold level.

Why have micro-finance loan rejection rates increased?

Shortly after the introduction of the new regulatory norms, there was a feeling that the rejection rate at the field level had gone up considerably. To ascertain this, we did a quick survey, where 40-45 MFI members gave their feedback. One of the reasons for the uptick in rejection rates was that income levels have gone beyond the qualifying limit of up to Rs 300,000 per annum. The other reason was the limit on outflows arising from the repayment of monthly loan obligations of a household as a percentage of the monthly income at 50 per cent.

Coming specifically from the rejection rate to the income limit itself, it can be due to two reasons. One, the income assessment may not have been done correctly; and two, many of the borrowers who are into their fourth, fifth credit cycle with MFIs, or even higher, may have seen their income go beyond Rs 300,000 per annum. This is probably one of reasons why RBI has allowed shadow banks — other than MFIs — to give micro-finance loans up to 25 per cent of their assets, from the earlier 10 per cent.

MFIs will now have to look for newer geographies. And Sa-Dhan had developed a Credit Assessment Framework even before the new regulatory norms came into being. This was developed as a responsible lending practice, and we are planning to develop it as a software tool.

Can more than one self-regulatory organisation (SRO) lead to arbitrage?

We have two SROs now — Sa-dhan, and MicroFinance Institutions Network. There’s no harm in having more than one SRO, as it will help in keeping a closer watch on players. The SROs working on behalf of RBI can get better feedback from the field and provide it to the regulator.

Multiple SROs mean a greater number of watchful eyes. And the sector has many types of players — both ‘for profit’ and ‘not for profit’. There’s no scope for arbitrage, as both SROs work independently under the RBI’s norms — the experience of the last seven years speaks for itself. 

Further, there’s a common code of conduct (CoC) which was developed jointly by both the SROs in response to the revised regulatory norms, and experts in the field work as committee members for both SROs. The CoC will be released soon.