India: A Comprehensive Approach across all Three Pillars of Responsible Finance
The case from India describes IFC’s early initiative to advance responsible finance across all pillars since it began credit bureau work in 2009. In 2010, a multiyear collaboration began with industry networks and the Smart Campaign on client protection principles, risk-management, and financial awareness.
Seeds of IFC’s Responsible Finance Program in India were planted in the Microfinance Credit Reporting Initiative in 2009. This initiative aimed to reduce the significant information asymmetry among microfinance borrowers and lenders by supporting increased linkages between MFIs and credit bureaus. In the wake of the Indian Andra Pradesh microfinance crisis of 2010, IFC developed the $3.1 million Responsible Finance Program as a comprehensive crisis response to strengthen the microfinance sector by emphasizing a customer-centric approach in institutional operations, raising awareness among decision makers and stakeholders, and uncovering the reputational risks facing the sector. The program was an early and comprehensive effort covering three levels of intervention: sectoral, institutional, and end-client.
At the sectoral level, partnerships were forged with:
- Industry-wide networks and associations, including India’s Micro Finance Institutions Network (MFIN), which covers the largest MFIs serving the sector (more than 80 percent of the market), and the information association Sa-Dhan, whose members include the entire MFI sector (NGOs, trusts, nonbank financial institutions), and the Small Industries Development Bank of India (SIDBI), a government body and major funder of the sector;
- International organizations, credit bureaus, and investors including Michael and Susan Dell Foundation (MSDF), Americans for Community Co-operation in Other Nations (ACCION), ACCESS Development Services, Smart Campaign, High Mark Credit Information Services Ltd., and Equifax; and
- Large and strategic MFIs including Ujjivan Financial Services Ltd., Grameen Financial Services Ltd., Utkarsh Microfinance Ltd., Shree Kshetriya Dharmasthala Rural Development Project (SKDRDP), Arohan Services Ltd., CASHPOR Micro Credit, Suryodaya Microfinance Ltd., Swadhaar Financial Services Ltd., Intellecash (MFI incubator), and FWWB Ananya.
IFC convened key sector institutions by setting up the Indian Responsible Finance Forum. It successfully facilitated the adoption of a harmonized code of conduct for the Indian microfinance sector and supported credit bureaus’ efforts to link over 65 million records to help MFIs address issues of multiple lending and over-indebtedness among clients in India. The forum now serves as a platform for key stakeholders (lenders, investors, donors, industry associations, and experts) to exchange ideas and determine activities to implement responsible finance principles across the sector.
At the institutional level, IFC partners worked directly with the large MFIs to adopt client protection principles. Ujjivan Financial Services, one such strategic MFI, is a market leader today in developing client financial awareness modules and has seen a change in the way clients select and service products and provide accurate financial information. In partnership with the Smart Campaign, industry-wide capacity building has been conducted for MFIs and service provides on the Client Protection Principles (CPP). In addition, the Smart Campaign’s largest program covering in-depth assessments with over 20 Indian MFIs is underway with further capacity building interventions planned in up to half of the institutions assessed.
At the client level, a comprehensive review of over 60 financial education programs targeted at low-income segments was completed in partnership with M-CRIL, one of India’s leading microfinance rating agencies. Findings of this review will inform IFC’s support in developing appropriate and sustainable financial literacy models. These models, which are intended to build client capacity in making sound financial decisions, are expected to be piloted and rolled out across 10–15 institutions that have an estimated outreach to 2 million clients.
For the Indian microfinance sector to recover from the crisis, a series of multidimensional yet interlinked interventions by different stakeholders was necessary. At a time when the sector needed cohesive and unified action to counteract the negative impacts of the crisis and when most MFIs were barely able to stay afloat, the institutions that came together under the Responsible Finance Forum helped advance responsible microfinance initiatives at the sectoral, institutional, and client levels. Five major initiatives were:
- Harmonizing a Code of Conduct for the sector. India’s Responsible Finance Forum succeeded in facilitating the adoption of a harmonized code of conduct by nearly 90 percent of the MFIs in the country. The code of conduct provides a set of robust guidelines to help design systems and processes for recruiting and training, staff conduct, client protection, and product pricing.
- Implementing responsible finance in practice. SIDBI, MFIN, and Sa-Dhan are working with MFIs to support capacity building to help institutions implement the code of conduct. Smart Campaign, with IFC support has facilitated six CPP training sessions, covering 56 MFIs, which constitute more than 90 percent of the sector. Through this partnership, IFC expects to reach 200,000 more clients. MFIs are working on implementation and changes in policies and procedures in line with assessment findings. Ujjivan, CASHPOR, and Grameen Financial Services are among the first Smart certified institutions in the world.
- Highlighting emerging good practices. The forum also helped create efficient communication channels between policy makers and the media. It supported national conferences to facilitate stakeholders’ interaction and commissioned several studies on trends, needs, and best practices within the sector. For instance, MFIN, the industry association with the largest nonbank financial institutions as its members, commissioned a study with IFC support on benchmarking human relations practices across the microfinance sector. MFIs are using the findings from this study to guide internal policies and ensure greater standardization across the industry.
- Tackling over-indebtedness through credit reporting. Over 95 million records are now available with the largest credit bureau in India, High Mark, covering more than 90 percent of the market. These records will help MFIs assess client repayment capacity and address issues of multiple lending and over-indebtedness among clients in India. The MFI Ujjivan has launched a widespread campaign on client awareness for credit reporting, and MFIN is now designing and disseminating a credit bureau awareness toolkit for borrowers in India.
- Complementing risk management with responsible finance. IFC is also supporting several Indian institutions to formulate a customized risk management strategy based on a risk management diagnostic and is building capacity in the sector for increased understanding of risk management and its link to responsible finance.The Responsible Finance Program won the Skoch Financial Inclusion Award this year for its work on advocacy and was recognized for being among the top 50 institutions working on financial inclusion in India. The Skoch Financial Inclusion Award recognizes best practices from the banking and financial services sector to promote inclusive growth in urban and rural India.
- Despite the India crisis, many MFIs still view responsible finance as a cost rather than an investment. A change in mindset to embed responsible finance throughout the operations of an institution for maximum effect is required. The previous challenge also applies to financial education. A review of more than 60 initiatives in financial education across India showed that although there is a clear need to implement financial education/literacy/awareness initiatives, typically these initiatives require substantial upfront investment and are costly to implement and difficult to scale in a one-size-fits all approach.
- MFIs need technical assistance and capacity-building support to help them implement responsible finance principles. MFIs need support to build the necessary internal capacity resources, systems, and processes to fully integrate responsible finance practices within operations.
- Finally, there remains a need for advocacy work across stakeholders (national and state government, Reserve Bank of India (RBI), India’s Central Bank, banks, development finance institutions, investors, and across larger and smaller MFIs). Key stakeholders, such as lenders and investors, are starting to incorporate responsible finance practices as part of their due diligence and selection processes, and there is a need for other funders, investors, and stakeholders to follow suit.