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Pricing Transparency in the Indian Microfinance Industry Published by mftransparency, 2013 - 08 - 12
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by Nithya Sridharan For most people, truly understanding the f ine print on their loan contract can be a daunting task. Even f or people with the advantage of higher education; discounting cashf lows across dif f erent time periods and transf iguring between various f orms of expressing interest rates is not easy. Now imagine yourself in the shoes of India’s 24 million[1] microf inance customers, who do not have the advantage of elementary education, let alone higher education. T his huge client base must now cope with the copious amounts
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Consumer Protection
of complex pricing data of microf inance products and must be able to discern which product is most suitable f or them. T his leaves them vulnerable to dubious MFIs and loan sharks. Protecting and empowering them is the mark of a responsible industry and the key to achieving this is transparency in pricing. Clear, suf f icient and timely inf ormation about credit products and their pricing, enabling MFI
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Financial Education MFT Event
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Pricing Initiative
clients to make inf ormed decisions is the aim of pricing transparency. PDFmyURL.com
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clients to make inf ormed decisions is the aim of pricing transparency. Bef ore delving into the details of what has transpired in India to address the issue of pricing transparency, it is relevant to understand what contributed to the pricing melange in the f irst
Regulation & Policy Responsible Finance
place. Around the world, there has been a lack of transparency with respect to the true prices of loans in microf inance. One reason f or this may be that microloans have a higher price than
Understanding Prices
standard loans due to the comparatively higher cost to the MFI of servicing those loans.. T he Annual Percentage Rate (APR), a standard way to represent the true price of the loan paid by the borrower in annualized terms, comes out substantially higher in the microf inance industry
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vis-a-vis conventional banking prices. To the common person, that sounds outrageous as they do not quite understand the dynamics of the business and see a f inal f igure which
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sounds unacceptable to them. So many MFIs simply stopped expressing the true price of the loan using APRs. T hey began to use quoted prices which were seemingly lower than the true prices. Once MFIs began adopting this route, it became hard f or anybody in the industry to actually quote the true price. To do so would leave that MFI at a great disadvantage of advertising a really high interest rate; though the MFI in reality could have the lowest true price in the market. Bef ore one knew it, hidden costs, compulsory deposit taking, insurance charges, and a lot of mumbo jumbo conf using the clientele were making the rounds, leading to
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obf uscated prices and a deviation f rom pricing transparency. Clearly the problem needed to be addressed both on a global level as well on regional and country-specif ic national levels.
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On the global industry-wide level, this is precisely why MicroFinance Transparency
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(MFTransparency) was established f ive years ago, to be the venue f or the microf inance industry to publicly demonstrate its commitment to pricing transparency, integrity and poverty alleviation. On the national level, and with the particular case of India, the industry and the central bank, (the Reserve Bank of India -RBI) had to pool in their ef f orts to tackle many issues that were plaguing the microf inance industry, including that of transparent pricing. T he RBI’s guidelines on Fair Practices Code (FPC) f or Non-Banking Financial Companies (NBFC) outline a number of key transparency principles to equip microf inance clients with inf ormation
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to make inf ormed decisions. It is mandatory f or NBFC-MFIs to comply with the RBI directives in India. Under the directive, it is required that the FPC is displayed in the vernacular by the NBFC-MFI in its of f ices and branch premises. It is also required that the pricing of loans should involve only three components – the interest charge, the processing charge, and the
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insurance premium and that this should all be clearly ref lected in the loan agreement. T he f act
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that no penalty can be charged on delayed payments and that no compulsory security deposit or margins are to be collected f rom the borrower must be made clear to the borrower
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according to the RBI. T he f ramework f urther supports client protection in matters of June 2010
transparency by including guidelines on client education through training. It states that the
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training about loan products, if any, should be of f ered f ree-of -charge to borrowers and that the f ield staf f should be trained to of f er such training.
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“T he market is way more mature today than it was three years ago” says N Srinivasan,
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independent director of Equitas and a board member of MFTransparency ref erring to the current state of the microf inance market in India. “Today, in accordance with the RBI guidelines, one has to provide inf ormation about the product in the f orm of a loan card or a pass book or other f orms specif ied. It is also required to use the local language and communicate in a way that is easily understood by the clients.” T he RBI guidelines f urther state that the MFIs must,
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at the very minimum, communicate the rate of interest on a declining balance scheme, processing f ee, other charges, total charges recovered f or insurance, and risks covered. T he MFIs are also required to communicate the interest rates as an all-inclusive f ee or f ull APR and as the equivalent monthly rate as well.
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T here have been several initiatives f rom the industry and service providers to address the
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issue of pricing transparency in India as well. MFTransparency conducted a Transparent Pricing
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Initiative in India in April 2010 f or the f irst time. A series of workshops were conducted in the country, which were attended by various stakeholders in the industry. T he Initiative aimed at raising awareness on pricing transparency through a combination of activities including data collection, training, and the development of education materials. MFTransparency promotes transparent pricing by presenting pricing inf ormation on credit products in a clear and consistent f ashion, not just f rom India but f rom across the globe. T he Microf inance Institutions Network (MFIN), an association of NBFC-MFIs, and Sa-Dhan, an association of community development f inance institutions, are two associations in India that have detailed out a Unif ied Code of Conduct (UCOC) to be f ollowed by their member MFIs. T he UCOC adds on to the mandatory RBI requirements, strengthening the principle of transparency in pricing. Some principles of the UCOC include the periodic checking of client awareness about
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MFTransparency is the leading provider of educational materials on pricing in the microfinance industry. Visit our Resource Center for more information. PDFmyURL.com
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products and services of f ered, clear conveyance of insurance terms to the client, and disclosure of f inancial statements of the MFI by qualif ied auditors. T here are many other independent organizations and initiatives that are also trying to aid MFIs in overcoming the shortcomings in pricing transparency on both national and global levels. Overall, pricing transparency is seen as an important part of client protection in India by the regulators as well as the industry. T he RBI f ramework and UCOC initiative by the industry advocate clear communication to the clients as a means of protecting the client f rom f inancial gobble-de-gook. Whilst tremendous progress has been achieved in this area, there is a lot of room f or improvement. “Like in any industry, there are bound to be outliers. Pricing
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Truth In Lending Tables (TILT) Dictionary Overview of the Pricing Transparency Index Understanding the Price Curve in Microfinance
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transparency is not adhered to by one and all, “says Mr. Srinivasan commenting on the issue. A periodic assessment of the level of compliance of MFIs with the UCOC pricing transparency principles will help identif y the areas of deviation, making it easier to point-out the dubious MFIs.
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MFTransparency, in partnership with MFIN, is currently recollecting transparent pricing data in
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India. In the coming weeks the true prices currently paid by Indian microloan borrowers will be
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publically disclosed. T his disclosure will provide a valuable insight into the impact of the various pricing transparency ef f orts within the industry, and ultimately will help
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microentrepeneurs to make better inf ormed decisions about their loans.
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Data f rom MFIN’s MicroMeter report in March 2013
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____________________________________________________________________________________________ Nithya Sridharan holds an MSc in Financial Engineering f rom Imperial College London and has a passion f or in-depth f inancial journalism and developmental economics. She has worked in the f inancial services industry in London and in India. Nithya is currently an independent researcher and writer in f inance. Her writings have been published extensively in various publications across the globe. PDFmyURL.com
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