Microfinance in India: A Colorful Market in a Colorful Country
Working on the Transparent Pricing Initiative in India is a very different experience as compared to any of MFTransparency’s other country initiatives. The microfinance market in India is unique in many ways related to outreach, products and practices that all affect pricing. In this post I will introduce you to some of the factors that give this colorful market its character.
Volume and variety of institutions and products
Transparent pricing has not yet been widely practiced in the Indian microfinance market because of the volume and variety of institutions and clients, and also the diversity of products. The products offered in the Indian microfinance market, by a wide range of institution types, include a range of financial products such as savings, credit, insurance, remittance and pensions. These cover many of the financial needs of the clients. Sometimes these MFIs also offer microfinance plus services to their clients like technical assistance for their livelihood activities, for example. In India, savings can only be collected by cooperative and local area banks, but other organizations also sometimes take savings in the form of a cash security or cash deposit. With so much diversity in so many ways, it has been difficult for the Indian market to implement standards of transparent pricing. MFTransparency hopes to help the Indian microfinance industry to do this.
Multitude of client protection and performance initiatives
On the front of client protection and social performance initiatives, a lot of commendable work has been initiated by the stalwarts of the Indian microfinance sector. Several leading microfinance organizations have been involved in the development of a Code of Conduct, which seeks to promote good governance and consumer protection. The networks Sa-dhan and MFIN have designed this type of code for their partners. Alpha Micro Finance Consultants P Ltd (Alpha), a MFIN initiative headed by Vijay Mahajan, chairman of BASIX, and P. N. Vasudevan, managing director of Equitas Microfinance, has been working to put together a credit bureau called “High Mark” dedicated to avoiding client overindebtedness in the microfinance sector. A lot of work is also being done in terms of social performance management. For example, the World Bank recently sanctioned a $300 million loan to SIDBI for scaling sustainable and responsible microfinance. MFTransparency hopes to work closely with all these initiatives to incorporate transparent pricing as an additional focus.
Progressive regulatory framework
The existing and proposed regulatory practices in the Indian microfinance sector have reflected the industry’s progressive nature for years. A good example of this is the proposed Microfinance Bill. The bill is expected to identify a specialized regulator for microfinance and the NGO-MFIs, while the for-profit microfinance entities will be governed by the Reserve Bank of India under their regulations for mainstream financial institutions. The new types of legal status for different MFIs will determine their future scope of services and their ability to mobilize various types of funding, also enabling some to be part of the mainstream financial system. We look forward to working with such proactive regulators to support their efforts toward client protection and transparent pricing.
While some of these factors make the Transparent Pricing Initiative in India a special challenge, they also indicate the industry’s commitment to taking action to improve its performance, both in social and financial terms. Check back regularly for more in-depth posts on these different aspects of microfinance in India.