A Conversation with Mr. Vasudevan PN, Founder and Managing Director of Equitas Microfinance India
MFTransparency spoke with Mr. Vasudevan PN, Founder and Managing Director of Equitas Microfinance India, about the need for transparency in microfinance, what responsible finance means, and policies that can help to further promote transparency in the Indian microfinance market. Equitas Microfinance is a member of MFIN, and was the first institution to submit data as part of MFTransparency’s Transparent Pricing Initiative in India. Located in Chennai, Equitas Microfinance is one of the largest MFIs in India with a Gross Loan Portfolio of INR 6,050,000,000 (approx. US$ 131,521,739) and a total of 880,000 active clients.
MFTransparency: Why is transparency important in the microfinance industry?
Equitas: Transparency in any area of life is always important but takes on an extra critical need when two people deal with each other out of whom, one is in a stronger position and the other, not. In the case of micro finance, the number of options available to clients is not many and hence they are constrained to accept what is offered to them by the service providers. Also almost all clients of microfinance come with poor educational backgrounds and hence their ability to understand complicated financial structures and offerings is low. This places the lender at a position where he has to be even more responsible than what would normally be called for in a typical lender-borrower relationship.
Transparency also pre-supposes a level of fairness. Only those who are fair and reasonable can afford to be transparent. Thus, if we merely insist on transparency and pursue it to its logical end, it would also automatically lead to the players adopting fair practices be it with regard to pricing, client interactions etc. Thus, we need not really start putting caps on lending rates etc. Instead, just advocating total transparency in the communication of lending rates itself would automatically lead to fair pricing.
MFTransparency: What does “Responsible Finance” mean to you?
Equitas: Responsible financing would include a few broad parameters viz:
- Doing a proper evaluation of a client’s ability to repay the loan before extending loans to her. A certain level of financial literacy training program becomes essential to understand the need of the clients and to structure the loan and other financial offerings to meet her needs best. It is quite often the case that a loan at the wrong time or a loan of the wrong size can lead to more pain than gain to the client.
- Fair pricing, which has been discussed above. There may be temporary opportunities to maximize financial returns from the loan transactions due to immaturity of the markets but the challenge is to see how lenders rein in their greed and instead look at the long term benefits and value creation for the client which would serve all the stakeholders more sustainably.
- Interactions with clients when clients run into overdues is another critical area of focus. While it is accepted that people who borrow should necessarily pay back to keep the trust in the lending activity intact, however if clients have genuine reasons for temporary inability to pay their installments — how is this viewed and how much of concern is shown by the company to the clients during such times of stress, is also an important aspect.
MFTransparency: What kind of practices and policies may help to promote greater transparency and consumer protection in the Indian microfinance market?
Equitas: The Reserve Bank of India (RBI) has issued various guidelines from time to time to improve transparency and client protection measures by Non-Banking Financial Companies (NBFCs). One of the guidelines mandates NBFCs to inform the clients of the lending rate by way of reducing balance method while another guideline mandates that NBFCs should necessarily give a copy of the signed agreement to the client, which should contain the full terms and conditions of the loan transaction. These are meant to ensure that clients are fully aware of what they are getting into and nothing comes as a surprise to them later on.
While companies do comply with these guidelines, it is also a fact that the communication takes place in such a manner that some clients still do not get a complete clarity on the terms of the transaction. I believe that the current legislation is adequate but the implementation should be made tighter.
The Micro Finance Institutions Network (MFIN), the association of NBFC-MFIs has joined hands with MFTransparency (MFT) to encourage all members of MFIN to submit their entire transaction terms with the clients to MFT. In the next few months it is expected that the true lending rate of MFIs would be made public, creating history in the Indian financial services sector.
‘Equitas’ is a Latin word which means ‘Equitable’ in English which means being fair and transparent. When the company started operations and had to fix the lending rate, we chose to take the lowest operating cost of any company at that point in time and then fix our price based on that benchmark — which meant that we will get a decent return on equity only when we reach the efficiency level of the best company in the market, rather than pass on the cost of a start up to the clients and look to make full Return on Equity (RoE) from early stage.
Equitas has always practiced fair and transparent practices from its inception. We are probably the first MFI in the world to mention the true cost of funds to the clients by printing it in the passbook given to them. We are probably also the only MFI who prints the break up of insurance between the insurance premium and the commission we earn. This has ensured that over the last 2 years, the two reductions of the premium that we received from the insurance company were passed on to the clients.
MFTransparency would like to thank Mr. Vasudevan for doing this interview with us and for his ongoing support of the Transparent Pricing Initiative in India.