To ensure effective functioning of Non-Bank Finance Company-Microfinance Institutions (NBFC-MFIs), the RBI has decided to recognise self-regulatory organisations for monitoring such institutions.
A self-regulatory organisation (SRO) is a voluntary body appointed by the industry participants to monitor the functioning of all players in the industry and bring in some degree of standardisation in industry practices.
In its latest notification released on Tuesday, the RBI invited applications from interested parties who wish to become SROs. At present, there are two SROs — Micro Finance Institutions Network (MFIN) and Sa-dhan — monitoring the functioning of NBFC-MFIs in the country. However, SRO as a body was not recognised by the RBI.
“The latest notification strengthens the hand of the industry,” said Alok Prasad, CEO, MFIN. “This carries huge weight.”
The RBI said that while membership of the SRO is not mandatory, NBFC-MFIs are encouraged to voluntarily become members of at least one SRO.
“The membership of NBFC-MFIs in the industry SRO will be seen by the trade, borrowers and lenders as a mark of confidence and removal from membership will be seen as having an adverse impact on the reputation of such removed NBFC-MFIs,” the RBI said.
The stipulations
In its guidelines, the RBI has said that a company wanting to become an SRO will have to have at least a third of the NBFC-MFIs as its members.
It further said that a third of the directors on the SRO’s board must be independent directors and not associated with member institutions.
The RBI also said that the SRO will have to put in place a grievances and disputes redress mechanism for the borrowers of NBFC-MFIs. It will also be responsible for protection and education of customers.
Technically, there can be multiple SROs as the RBI has called for applications from interested parties, but realistically there may be only one or two because the RBI has said, “SROs must have adequate capital to be able to discharge its functions without being overly dependent on subscription from members.”
satyanarayan.iyer@thehindu.co.in