By focusing on one concrete case, the microfinance crisis in India, Cécile LAPENU wanted to identify lessons learned: what has changed after this learning event, what is the role of different actors in responsible finance and how can experiences in India be applied to other crisis situations?
Alok MISRA used the perspective of a rating agency to look at the initiatives shaping India's responsible microfinance landscape, how they changed industry practices and what future challenges remain. He started by concluding that microfinance regulation enacted by the Reserve Bank of India (RBI) has proven most effective in building a responsible microfinance industry, followed by the Industry Code of Conduct (CoC). The Universal Standards for Social Performance Management (USSPM) and the Customer Protection Principles (CPP) were much less effective in changing behaviour. The principal reason is that USSPM and CCP principles are incorporated in RBI regulation in terms of issues such as indebtedness, pricing, behaviour and transparency. Moreover, the CoC adds additional standards supporting responsible microfinance including governance, human resources, grievances, privacy and client education. He also stressed that MFIs focus on what is demanded by their funders. Many give precedence to regulatory compliance and not to "aspirational" principles of USSPM and CCP.
He then looked more specifically at change in terms of different Social Performance Management (SPM) standards. As to the definition and monitoring of social goals he saw minimal change. Mission statements were not smartly formulated and internalised in the organisational culture. Also the poverty focus is mostly regulation driven. In contrast, good progress was achieved in institutional commitment, although reporting remains focussed on compliance. Misra also pointed at minimal improvement in product offering. Although client needs are better known, RBI regulations restrict MFIs to design products to meet them. Much better progress was achieved with client treatment, due to more product transparency, better staff incentives and auditing of staff behaviour. He also saw some progress in staff treatment although a gap remained between policies and practice. Finally, the balance between social and financial performance remained mostly regulation driven.
Without a culture to do what is desirable instead of what is mandated, regulation or a CoC will not prevent unsustainable growth from returning. There is still a culture of growth and institutions cannot keep up with such growth, not in terms of systems but especially in terms of staff training. He points out that usually most staff is never trained on responsible finance. Moreover, while innovation is possible within the regulatory framework, the drive for growth fosters product standardisation.
Ratna VISWANATHAN presented how a self-regulatory organisation (SRO) can help build a responsible microfinance sector. Microfinance Institutions Network of India (MFIN) was established in 2009, prior to the crisis in Andhra Pradesh. As microfinance regulation came into effect in 2010, they started to organise themselves as a SRO to establish standards and practices. Since June this year, they received a self-regulatory mandate from RBI and were designated to perform industry surveillance, grievance redress, dispute resolution, training and knowledge dissemination and data collection. An important tool offered to members is the Responsible Business Index, a self-assessment tool to help MFIs measure, manage and integrate responsible business practices into their operations and strategy. It encompasses the RBI Fair Practice Code and the industry CoC in terms of customer disclosure and engagement, institutional procedures and transparency. MFIN is in the process of enabling third party audits of self-assessments.
Viswanathan mentioned several advantages of the SRO model. Firstly, being an industry representation body means its members have an empathetic view towards it, making it easier to embed responsibility among members. Secondly, a SRO can act more flexibly and at lower costs than central banks. On the downside, conflicts of interests can occur if roles are not clearly established and communicated. The institution also must contend with low willingness among members to be transparent. The continued risk of uncontrolled growth requires awareness raising and training, in addition to early identification of problem areas to avoid another crisis which in the current political climate, would be damaging to the industry and its current model of self-regulation.
Lukas WELLEN presented the Voice of the Client initiative which aims to increase microfinance transparency and accountability. It responds to a need to enrich current social performance assessment approaches, such as evaluations, impact assessments and theories-of-change. While these provide useful insights, they are costly, time-intensive and unsuited to guide management decisions as their results are difficult to compare over time and between products and branches. Borrowing from private sector customer satisfaction surveys, Voice of the Client offers a bottom-up, client oriented approach focusing on key CPP questions. This makes it possible to look at trends and compare branches, client categories and MFIs. A first pilot in India used different data collection methods, including Interactive Voice Response (IVR), telephone calls and face-to-face interviews. Such a combination digs deep into the MFIs client base, including women and the poorest-of-the-poor.
First results show considerable differences in outcomes between methods. This could mean that IVR gives clients a feeling of anonymity which makes it easier to criticise MFI performance compared to face-to-face or telephone interviews. During next steps, testing will continue in order to develop stable cost-efficient systems for data collection. This will help MFIs to improve their understanding of client needs, a support client retention, product development and portfolio improvement. It can also provide benchmark reports for MFIs and investors.
During the discussion, Wellen further explained that the main goal was to develop a cost-effective tool which allowed for a trend comparison. However, he stressed that the information has its limits: it can only identify "trouble spots". MFIs need to use different data collection techniques to go more in-depth.
Next, the discussion turned towards whether the crises in Andhra Pradesh can be considered a learning event, or whether we are heading towards a new crisis. Misra explained that we learn both internally, by changing our views or culture, and externally, where learning is imposed. Internal learning is more lasting, but has not truly taken place. Now, with RBI relaxing its requirements you can again see overheating tendencies in several markets. Viswanathan signalled the risks that come along with a return of market and investor confidence. However, the situation has improved in terms of data collection and reporting practices to give an early warning. She added that client survey techniques such as Voice of the Client could further help identify bad practices.
Lastly, the discussion turned to over-borrowing, and how regulation targets this issue. Viswanathan explained how caps on loan size and number, as well as credit bureaus were established. She stressed that although this development greatly improves transparency and contributes to reducing overindebtedness and credit portfolio deterioration, the system does not work perfectly. Misra added that as long as a responsible finance culture is not internalised in the industry, regulation can only get us so far. Continued training and awareness raising by MFIN will be needed.