Reforms in Practice: Code of Conduct and Self Regulation

Relevance of Self Regulation Puts the customer back to the centre stage: raises dignity, trust, loyalty and improves decision making of clients Aims at long term sustainability Supplements laws of the regulators Improves public trust Makes the industry accountable for its actions Bridges expectation gap and manages reputation risk

National and International Experiences in Self Regulation Advertisement Industry in Brazil: successful self regulation with clear rules and strong enforcement Self-regulation by the Swiss Bankers Association (SBA): self regulation on capital flight, money laundering; backed by regulatory authority Indian Bank’s Association: voluntary ground rules on business conduct AMFI self regulation for mutual funds: planned to be SRO by SEBI

Approach to Self Regulation Client protection and ethical microfinance discussed in Sa-Dhan as early as 2004 Sector faced crisis in 2006 in Andhra Pradesh, 2008 in parts of Karnataka and elsewhere 2007: introduction of Code of Conduct by Sa-Dhan -largely as a voluntary effort. Later Studies indicated need for an effective and more comprehensive attempt

Approach to Self Regulation 2009/2010: review of Code of Conduct and design of implementation strategy 31th August 2010: a refined Code of Conduct adopted by Sa-Dhan General Body September 2010: start of data collection November / December 2010: first set of workshops on Code of Conduct and validation of reported data across India Report on client protection and social performance of Indian MFIs available here at conference (including data analysis and implementation strategy for MFIs and Sa-Dhan)

Basic Principles of Self Regulation Transparency Fair-play Honesty Self implementation and monitoring Enforcement

The Pillars of the Code Integrity and ethical behavior Transparency Fair practices Avoiding overindebtedness Appropriate interaction and collection practices Privacy of client information Governance Client education and financial literacy Competition Feedback and grievance mechanism

Important Aspects Under Each Pillar: Integrity Treat clients and employees with dignity Incorporate transparent and efficient practices Client education on Code

Important Aspects Under Each Pillar: Transparency Disclosure of all terms and conditions Spelling out in writing rate of interest and method of charging and other charges Terms of repayment Provide information on savings/ other financial service Provide written statements of accounts

Important Aspects Under Each Pillar: Fair Practices Financial services to be provided irrespective of gender, caste or religion following fair practices Collateral free loans following principles of Microfinance Provision of courteous and efficient services through cost effective means Release all securities on repayment

Important Aspects Under Each Pillar: Avoiding Overindebtedness Need based finance to clients based on repayment capacity Appropriate non credit inputs (services) with transparent terms

Important Aspects Under Each Pillar: Recovery Practices Well defined policy to deal with client default Avoiding inappropriate occasions and harsh and socially unacceptable methods for recovery More use of social collateral

Important Aspects Under Each Pillar: Privacy of Client Information Keeping client information confidential Disclosure only with permission of client

Important Aspects Under Each Pillar: Governance High standard of governance – one third independent directors Transparent accounting policies with full disclosure Approval of CEOs compensation by the board Compliance report on Code of Conduct every year to the board

Important Aspects Under Each Pillar: Client Education and Financial Literacy Provide full information on products and services to clients so they can make informed choices Conduct periodic client surveys to identify gaps in client’s expectations Design products and procedures in tune with customer needs

Important Aspects Under Each Pillar: Competition Regular interaction with other MFIs Fair and ethical practices for recruitment For Future Expansion, Explore un-served and underserved areas

Important Aspects Under Each Pillar: Feedback and Grievance Mechanism Set up compliant redressal mechanism Designate an official to handle complaints Notify clients of grievance redressal mechanism Inform clients of Ethics and Grievance Redressal Committee of Sa-Dhan as appeal mechanism

Important Aspects Under Each Pillar: Compliance Mechanism Ethics and Grievance Redressal Committee of Sa-Dhan to function as the SELF REGULATOR Regular feedback to Sa-Dhan on level of compliance Data validation through field and desk monitoring Complaints on non adherence to be dealt with by the committee Stiff punishment norms for non-compliance Regulators/Funders/Rating agencies to examine level of compliance using the Code of Conduct framework

Road Ahead for the Sector

Road Ahead for MFIs Adoption of Code by the Board of Directors Internalisation of the Code into policies, guidelines, manuals, operating instructions, forms and software Dissemination and training: Code to be part of MFI communication and appearance, staff and client training Implementation at ground level: Code to be integrated into incentive structure of MFIs Feedback mechanism: creation of grievance redressal mechanism in organisation; education of clients and staff about it; Sa-Dhan Ethics and Grievance Redressal Committee (EGRC) Monitoring: feedback collection and regular review by Board, inclusion of Code of Conduct in internal inspection /audit, regular reporting to Sa-Dhan

Road Ahead for Sa-Dhan Data collection: ‘On and offsite’ tracking of compliance to Code of Conduct Capacity building: workshops to improve client protection based on data collection Enforcement: compliant redressal through Ethics and Grievance Redressal Committee--Removal from membership as final option for non compliance Stakeholder engagement: Regular information on level of Code compliance of sector through reports, events and media engagement

Information Flow in Self Regulation

Present Level of Compliance Feedback on implementation of Code of Conduct collected from 109 member organizations Out of this, 37 were validated through field visits/ desk review Results show gaps in implementation: client appraisal, feedback mechanism need improvement, Code needs to be integrated into internal inspection/ audit Greater effort in internalization and greater commitment from the top management for Code adherence Results of data collection to form inputs for coming workshops across India

Sum up Outcome -MFIs treat clients and community as partners submit to self regulation and demonstrate to all stake holders the sector’s willingness for self discipline Re- focus on the customer and thus create customer loyalty Substantially lower reputation and political risk Improve credibility in the eyes of the funders/regulators Put the sector on a sure road to sustainability

Help and support For general inquiries, Sa-Dhan Code of Conduct team (Delhi), Telephone: 011 47174400 , email: policyteam@sa-dhan.org For reporting on Code of Conduct, Sa-Dhan member services, Telephone: 011 47174400, email: mservices@sa-dhan.org Sa-Dhan regional office Hyderabad, Telephone: 040 40216026 , email: hyd@sa-dhan.org

Help and support Language Name of Sa-Dhan specialist Telephone English Thomas Mehwald (Code of Conduct Coordinator) 011 47174400 Hindi Punit Kumar Singh Oriya Susanta Kumar Behara (0) 9937299020 Telugu Dr. Krishna Reddy 040 40216026 Tamil K. Natarajan Bengali A. Nandi

Help and support Thank you.