Aligned Objectives of MFIN & MFT
The Microfinance Institutions Network (MFIN) is one of the organizations that MFTransparency has partnered with on the Transparent Pricing Initiative in India. MFIN has played a big role during the data collection process by motivating its members to participate. MFIN is a self- regulatory body floated by the top microfinance institutions (MFIs) of the country, with 43 non-bank financial companies (NBFCs) as its members. MFIN’s objective is to work with regulators to promote microfinance, enhance responsible lending and institutionalize the process of credit information sharing. MFIN has also designed a Code of Conduct for its members. Mr. Vijay Mahajan, Chairman of the Microfinance India Network, says of the code, “Proper enforcement of the code of conduct would lead to greater financial inclusion. The aim is to stop multiple lending, which leads to delinquency.”
MFTransparency’s work addresses some of the same issues as the MFIN Code of Conduct. The overlap lies in the part of the code outlining “fair practices with borrower.” As the main objective of microfinance is to serve the poor, transparency with the clients is of utmost importance.
Although there is no one correct way for MFIs to communicate charges to their clients, full transparency and clarity about all charges should be mandatory. Before taking a loan from an MFI the client should know all the terms and conditions of the product. If there are several different options available to them, the client should be able to choose one according to the services they require. The MFIN Code of Conduct outlines the following as loan terms that all MFIs must communicate to borrowers:
- All the important terms and conditions of the loan agreement: This includes all the services provided to the clients. Clients should know what services they can avail as they are paying for them. Loan terms, grace periods, interest rates, interest calculation method, cash security, etc should be mentioned clearly on the loan agreement.
- Declining rate of interest: Calculating payments using the flat interest rate method is easier as compared to the reducing balance calculation. It’s also easier for clients to pay the same amount in interest every period. In the Indian microfinance market the clients who have availed services from the NGO-bank linkage model already have a clear understanding of the declining interest method. If some conscious efforts were made to educate those clients who don’t already understand the declining method it would likely be very effective. This is a very important concept for clients to understand because borrowers pay much more on loans using the flat interest calculation method, which is not always understood.
- Processing fee: There really is no one single price for an MFI or for any of its products. Prices can vary even on a client-by-client level. Fees affect different borrowers in different ways. For example, a 2% up-front fee on a 6-month loan is twice as expensive as a 2% up-front fee on a 12-month loan. What we do at MFTransparency is calculate the precise price from a range of loan samples provided by the MFI. The prices are rarely identical for all borrowers in the sample, but we analyze the differences and determine why they vary.
- Any other charges: During our data collection process, many MFIs had difficulty in reporting the specifics of their products and fees, especially those which included charges for technical assistance, insurance, etc. Though we did not factor charges for optional services into the APR of each loan, we did require MFIs to report the fees of the services which are compulsory. For example, some MFIs offered livestock loans which included mandatory insurance for the animal and also fees for the technical assistance related to the veterinary services and market linkages. At MFTransparency we like to see these services offered as they are often very valuable to the borrower, but at the same time it must be recognized that these services also have a cost which client has to bear. As a fee, these services should be included in the documents provided to the clients and should be factored into the APR calculations.
- Security or any other deposit: In India only Banks (Cooperative, LABs, etc.) are legally allowed to take savings, but a few MFIs circumvent this policy by instead requiring a cash security or cash deposit. Though this difference in terminology may make a difference in the legal issues, when it comes to the calculation of the APR the effect is the same. No matter what you call it, if the client keeps a certain amount of cash with the MFI, it affects their cashflow and in turn the APR of the loan. Therefore it is very important for the client to not only know the amount of such deposits that they are required to make, but also when they will be able to access these deposits (with or without interest).
- Systematic advance collections: Advance collections occur in two instances. In some cases, the client has additional cash inflow and therefore they decide to make advance payments, or the loan officer does not have change and therefore some advanced payments are made in the field. These are both considered voluntary advance payments. In other cases, MFIs require that clients make an advanced payment. Occasionally, an MFI will tell a client that they have a grace period or moratorium period of 1- 2 weeks, but their systematic advance collections start from the next week. As there are no issued rules and regulations on this practice, an MFI can decide to change repayment dates without notifying a client ahead of time. This is an important issue, and one that affects the APR of a loan as well, typically increasing it.
- Total charges recovered for insurance coverage risks covered: There are several types of insurance provided to clients in the Indian microfinance industry, including life insurance, health insurance, insurance on savings products, client and spouse coverage and sometimes also family coverage. Although these can be very valuable to the client, as mentioned earlier, whatever fees are mandatory for the client to avail the credit must be included in the APR calculation. There are several different ways that MFIs communicate their insurance services to the clients. Some MFIs have fixed or percentage charges for a particular loan amount, some give insurance as a package of services provided and don’t communicate it as a separate fee and a few societies require a contribution of emergency funds and use them as insurance. With such a high degree of variation, it is important that the type of coverage a client receives and what they pay for it are communicated clearly.
Communication of all terms and charges to clients is an important component of pricing transparency. This includes some specific parameters, such as making sure that the client has all this information in writing, and preferably in their local language. Not only is communication of pricing included in the MFIN Code of Conduct, it is also practiced by many Indian MFIs internally. Transparent communication of prices is one of the practices that MFTransparency also emphasizes. This shared objective with the Indian microfinance industry has really helped to make the Transparent Pricing Initiative in India a success.