1. 17TH MICROCREDIT SUMMIT#17MCSumGENERATION NEXT: INNOVATIONS IN MICROFINANCEmitMicrofinance and SelfRegulationThe India Experience

2. 17TH MICROCREDIT SUMMIT#17MCSumGENERATION NEXT: INNOVATIONS IN MICROFINANCEmitWhat is an SRO?Industry WatchdogSupported by the Industry and other stakeholdersEnsure honest & prudent behavior by member institutions, with a focus on clientprotection and responsible lending, which are integral to their reputational capital and inturn increase their franchise value.Ensure member compliance with applicable governance standards & RBI laws. 3. 17TH MICROCREDIT SUMMIT#17MCSumGENERATION NEXT: INNOVATIONS IN MICROFINANCEmitThe Committee set up by the RBI under YH Malegam to study MFIsobserved that of the four pillars of the MFI industry regulation :The second pillar is an association. If one third of MFIs becomemembers of an association, they (RBI) will recognize it. The associationwill have its own code of conduct. If discipline is not observed, theassociation, which will be something like an SRO (self-regulatoryorganization), can remove that member,YH Malegam on Four Pillars of MFI regulation 4. MFI SRO.17TH MICROCREDIT SUMMIT#17MCSumGENERATION NEXT: INNOVATIONS IN MICROFINANCEmit The notification DNBS.CC.PD.No. 250/03.10.01/2011-12 dated December 02, 2011,issued by the Reserve Bank of India (RBI) expects Industry associations to assumegreater responsibility in ensuring compliance The RBI issued guidelines on Self Regulatory Organization (SRO) for NBFC-MFI dated 26Nov 2013 laying down the criteria and inviting applications MFIN applied to RBI for formal recognition and was recognized as such in June 2014 So far, the first and only SRO in the financial services sector 5. RBI Criteria for RecognizingSROsi. The SRO should have at least 1/3rd of NBFC-MFIs registered as its members ii. It should have adequate capital to be able to discharge its functions iii. The memorandum of the SRO should specify criteria for admission / functions iv. The memorandum of the SRO should specify criteria for the Governance v. The Board should have adequate representation from both large & small MFIs vi. 1/3rd of the Board of Directors should be independent vii. The Board & individuals comprising the management should be fit and proper viii. It should have adequate internal controls in place ix. The SRO should function in the interest of all the stake holdersx. The SRO should frame a Code of Conduct to be followed by its membersxi. It should have a Grievance Redressal Mechanism and a Dispute Resolution Mechanism in17TH MICROCREDIT SUMMIT#17MCSumGENERATION NEXT: INNOVATIONS IN MICROFINANCEmitplacexii. It should be in a position to exercise surveillance over its members to ensure compliancewith the Code of Conduct and regulatory prescriptionsxiii. It should also have a developmental function of training and awareness programmes for itsmembers 6. MFI SRO.17TH MICROCREDIT SUMMIT#17MCSumGENERATION NEXT: INNOVATIONS IN MICROFINANCEmitMFIN is, as per its charter, constituted as a Self Regulatory Organisation for memberNBFC-MFIs, with its Bye-Laws stating: To act as a self-regulatory organization for themicrofinance sector and to regulate the business of microfinance as carried on by itsmembers. 7. Key risks in providing financialservices to low-incomehouseholds in IndiaExternal Internal17TH MICROCREDIT SUMMIT#17MCSumGENERATION NEXT: INNOVATIONS IN MICROFINANCEmit Political risk Regulation risk Bureaucratic risk Funding risk Reputation risk Mission drift risk Compliance risk Credit risk Operations risk Tenor risk Cash handling risk People riskOver-indebtednessMultipleLending 8. 17TH MICROCREDIT SUMMIT#17MCSumGENERATION NEXT: INNOVATIONS IN MICROFINANCEmitExpectations from the SRO1. Exercise surveillance over the industry to ensure compliance with RBIsregulatory prescriptions and industry code of conduct with a dedicatedCompliance Officer who will also have a direct reporting relationship with RBI2. Have an Enforcement Committee 3. Have a Grievance Redressal mechanism primarily from the standpoint of clients with a dedicated Grievance Redressal Nodal Officer 4. Have a dispute resolution mechanism 5. Conduct investigations into areas of concern as the RBI may require 6. Provide information / data to the RBI periodically or as request 7. Perform developmental functions through training and awareness programmesas also conduct research etc for the microfinance sector 9. SRO Framework at MFIN17TH MICROCREDIT SUMMIT#17MCSumGENERATION NEXT: INNOVATIONS IN MICROFINANCEmitMFINs role as a SRO hinges on five factors: Surveillance Grievance Redressal Dispute Resolution Data Collection Training and Knowledge Dissemination 10. 17TH MICROCREDIT SUMMIT#17MCSumGENERATION NEXT: INNOVATIONS IN MICROFINANCEmitThe Price of Failure