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India: Micro-finance Institutions (MFIs) Agree on Common Code of Conduct

Indian Micro-finance institutions under the auspices of Sa-Dhan (Association of Community Development), finance institutions and MFIN (Micro-finance Institutions Network) have released a code of conduct which would enable them to put up a joint front to promote and protect the industry.

  • The code of conduct centers on the premise that MFIs seek to avoid the over-indebtedness of clients
  • MFIs must conduct due diligence in keeping with their internal credit policy to assess the need and repayment capacity of clients before making loans
  • MFI’s should not, under any circumstance, breach the total debt limit for any client as prescribed by the Reserve Bank or Central and State Governments
  • Copies of the relevant documents, in line with the standard KYC norms, must be obtained
  • MFIs must keep personal client information strictly confidential except in cases listed in the code
  •  All terms and conditions for all products/services offered must be disclosed (processing fees, interest rates on reducing balancing method).  Disclosures must be made prior to disbursement of the loan
  • All terms and conditions for all products/services must be offered to clients in the official regional language or a language understood by them
  • The code also includes provisions on appropriate ‘interactions’ with clients, for example debt collection

The trigger for this move is the results of reports about usurious lending practices combined with coercive recovery procedures adopted by microfinance institutions.  The Malegam Committee had stipulated that MFIs must have a common code of conduct.

The Reserve Bank of India in October 2010 set up a Sub-Committee of its Central Board of Directors to study the issues and concerns in microfinance sector, under the Chairmanship of   Shri Y H Malegam, a senior member on the Reserve Bank’s Central Board of Directors. Other members of the Sub-Committee included Shri Kumar Mangalam Birla, Dr. K C Chakrabarty, Deputy Governor, Smt. Shashi Rajagopalan and Prof. U R Rao. Shri V K Sharma, Executive Director, Reserve Bank of India was the Member Secretary to the Sub-Committee.

Source:  The Hindu Business Line Dec. 15, 2011

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