Investment Advisor Regulation I: SEBI’s ideas are, as usual, far from reality; may increase mis-selling!

If SEBI’s new norms on investment advisors come into force, mutual fund sales will decline even further and mis-selling of insurance products will increase!

When UK Sinha took over as the chairman of the Securities and Exchange Board of India (SEBI), small distributors were elated. As the head of Unit Trust of India, he had after all felt the impact of a series of harebrained decisions by SEBI under the previous regime relating to mutual funds (such as abolishing upfront commissions abruptly). Small distributors hoped that Mr Sinha would reverse the previous decision or at least make sure that distributors are incentivised in some way. He stunned them by coming out with a more harebrained idea-a small charge to first-time investors. Polite criticism pointed out a simple flaw-how do you define "first-time"? It was no surprise that SEBI had not thought about it. It usually doesn't.

SEBI under Mr Sinha has now a gone a step further which would create major headwinds for the fund industry, especially after an 22nd August circular which asks mutual funds to implement a segregation between an agent and an advisor. SEBI now wants to regulate investment advisors and that too through the completely failed concept of Self Regulatory Organisations (SROs). No matter that its grievance redressal system is not exactly pro-investor, no matter that there is no surveillance worth talking about and market manipulation is rampant, no matter that its consent order system allows crooks to get away, investment advisor regulation seems to be a priority for Sinha.

SEBI has just released a concept paper, which lays down how an SRO would be formed to regulate investment advisors who will be registered under SEBI. The crux of the regulation is: "No financial incentives/consideration would be received from any person other than (an) investor seeking advice". What does this innocuous-sounding rule mean?

First, distributors simply cannot provide advisory services for a commission; they will have to sell for a fee. This means that if one wants to earn a commission and not a fee (since investors don't want to pay fees) he would have to identify himself as an 'agent'. Unfortunately, this means getting a letter signed from an investor that he is buying the product out of his own free will and that the agent has not done any due diligence. Few investors are willing to give such letters. No distributor is asking for it, either.

Second, the only mainline investment product that comes under SEBI is mutual funds. Issues related to other financial products will be dealt with the respective regulators. As such, there would be no single body regulating investment advisors. Is there mis-selling of mutual funds? Well, there has to be selling first! Mutual funds are struggling to add assets-SEBI's August 2009 decision has ensured that interest in mutual funds has totally waned.

In August 2009, SEBI had banned entry load for mutual fund investments. Investors were free to decide the upfront commission to be paid to the distributor/agent, based on factors like assessment of the service of the distributor. The effect has been disastrous. From the time of the ban till August 2011, there has been huge outflow of money. SEBI simply was out of touch with reality when it assumed that investors and distributors would negotiate for the service. Even the healthiest financial services don't sell by themselves. That's the lesson from all around the world. It takes a lot of hand-holding and convincing to get someone to invest in volatile products like mutual funds. Devoid of upfront commissions, the agents simply did not want to take the trouble to sell mutual funds after August 2009. Many distributors were happy to push insurance products, which earned them higher commissions.

Under the new proposal of SEBI, this would not change. This would get aggravated. While very few people would be interested in selling mutual funds for a fee, an "investment advisor" selling only insurance products does not come under the proposed Investment Advisor Regulations. Therefore why would an existing advisor pay for a certification to become an "Investment Advisor" when he is "better off" selling ULIPs (unit-linked insurance plans) as investment products?

The media is full of stories of mis-selling of insurance products. From those nearing their retirement to 80-year-olds have been sold retirement products where they would have to pay a substantial amount for annual payment across 10 years. Sadly, even if the proposal of SEBI comes into force, such cases would continue. Incidentally, the biggest mis-sellers are large banks and SEBI's regulation will not affect them one bit.

Of course, one could argue that the intermediaries would find a way to get around these rules. That is the subject of part two of this series.




6 years ago

Firstly, I agree with the following:
1. Financials advisors and intemediaries need to be better regulated in this country.
2. It is the job of the regulators/ SRO, such like to regulate them.
3. Preferably regulations should not be hasty and ill-thought, and the industry and stakeholders (investors, manufactuers & intermediaries) should be given sufficient time to make the changes required for them to work under the new rules – which will help in a smooth transition.
4. Proper education is required to be provided to all the stakeholders, on how to engage their partners under the new rules

However, having read through the draft paper, I feel it falls short in many respects and needs significant amends:
1. Though the concept paper says the Indian investors are not yet financially very literate (para 2.4), they expect them to understand and differentiate the services of the agent from the advisor – and thus feel the need to pay for the services of the capable advisor – an ideal situation, don’t you think? I feel the time has not yet come for this in India. It requires a lot more “financial literacy” – which the concept paper itself admits, we Indian mostly lack.
2. They quote the FSA in UK – like a benchmark – however, one must note that the FSA and other US bodies are making regulations for people who are used to living in a culture where children – from a young age – are trained to respect and pay for help rendered – like it is any other job. So culturally, the people in these advanced economies are used to paying for services that they use. Though this will come about as we progress, maybe it will take a while before the regular investor in India feels the same way, and appreciate the fact that he/she needs to pay for financial advice.
3. Why are Stock brokers being excluded from the rules of the concept paper? Aren’t they also financial advisers in every sense of the term – if they are going to recommend a stock to buy? Are they scared that liquidity will drastically drop in the equity markets if they do so?
4. SEBI says nothing yet about whether they will differentiate financial products/ schemes - whether mutual funds or others - that will give a benefit to advisors to market themselves – like mutual funds for agents and mutual funds for advisors. Obviously, we can expect “Investment Advisors” to put pressure on SEBI/ AMCs to create lower cost products for them… This is likely to play out. But SEBI has not given a mention about it.
One main amendment/suggestion to this concept paper is this –
1. Have rules / guidelines set for working as an agent and as an advisor, separately. Obviously, the rules for advisor will be more stringent with higher level of audit & eligibility requirements. This can be overlooked by an SRO / as well as respective regulators.
2. Give all agents/ advisors to choose and work in both capacities if they meet the requirements set - . Here, it would presumably start with being an agent, and then elevate oneself to being an advisor. Some may choose to remain only as an advisor or an agent also.
3. Every client should be compulsorily be registered only as either one - “agent- relationship” or “advisor relationship” and subsequent agreements on fees etc should be drawn up at the start. This cannot be changed for each transaction.
4. This gives leeway for the agent/advisor to work up the value chain, while the client has the freedom to choose what relationship he wishes to have with the agent/ advisor to start with.

I hope that this suggestion is taken up. I call on distributors to write their suggestions/ feedback to the email id given in the concept paper.

Shrikant Kulkarni

6 years ago

The things were moving smoothly and the Industry was doing fine. Abolition of Upfront commission created a mess. Many people left the industry. Now SEBI wants to rectify the wrong but its ego hearts to reintroduce the entry load. They want to introduce the entry without it looking like an entry load. Funy,
what is wrong in accepting the wrong action and think to re-introduce the entry load. The rate may be brought down from 2.25% to 1.5% and close the chapter.


6 years ago

a verywell said analysis

srinivas chandolu

6 years ago

first let grow mf industry substantially.then they can come with new drafts.when inflation is going high n commissions are not matching to inflation how can a ifa will survive?gont wants to handover the business to corporates majorly.

Sweena Jain

6 years ago

There are innumerable regulations in our country.The more regulation higher are the chances for corruption.This new regulation seems for corruption only.
SEBI's one regulation is it is mandatory for all market intermediaries--COMPULSORY REGISTRATION.But many brokers looted public by appointing unregistered intermediaries which turned to be fly by night operators .There are no dearth of complaints with SEBI pending under this regulation.The stock exchange grievance resolution center are no better option.Most of the time Stock exchanges direct investors to opt ARBITRATION route at Investors cost and consequences.When there is break in any regulation the ACTION must be as per prescribed penalty in the said regulation.To sum up it is SEBI's act which are being opened for floodgate for corrupt and malpractice.And we should view SEBI's action in this scenario.

Dr Vaibhav G Dhoka

6 years ago

Here regulators are established by acts of parliament.Regulator is another form of INSPECTOR RAJ.Regulators once established wants to show that they are BOSS of organisation.They bring different regulation without application of mind.One such regulation is Self Declaration form to be submitted by every mutual fund ad visor(ARN HOLDER) to every AMC he is registered for the reason is ARN holder should not by Mutual fund on his own ARN number.Now SEBI should inform and give statistical data about this regulation.
1)How many ARN holders were booked under this regulation.
2) What is the cost AMC and ARN holders pay since this regulation came in existence?
3)Was this cost worth for this regulation?
4)How could this regulation prevent mis-selling?
There are so many fields where SEBI chief can act and give relief to petty investors.He should reign in Stock brokers,and see that his officials work for the benefit of investors and not collude with Stock brokers.
The investors grievance resolution department is worth dismantling as the DON'T work or work only for for brokers.In India regulation are for Extra earning for the regulator.i.e for proliferation of CORRUPTION.


6 years ago

i think in the comments we are fighting between us the core issue is wether it is relevant to apply the logics set by SEBI on advisory model how will you keep audio records will everyone carry a taperecorder. what is the sense ? secondly why an agent category who will again escape if after advisory he sells a different products are these issues redressable or will the regulator become court room to tackle the redress the simple solution is why the hell regulator is bent upon killing the mutual fund industry ? they dont have any other work are tese people accountable why they are charging high fees of registering the ARNs ?now other mad shot from TRAI to register for telemarketing the cost of registeration Rs.10000
are they just minting money for their enjoyments and asking us to go about begging for the fees can any regulator come down and show in reality how difficult it is to survive in this business forget the regulations who is ready to pay you fees? are we matured enough to understand our mindset before comparin to developed economies we have so much time to educate clients free of cost and the clients are enjoyiing the fighting going on between IFAS and IFAs


6 years ago

If I decide to be an agent instead of advisor does that mean I will not have to pay Service Tax !!!!

santosh roy

6 years ago

The Regulator has done so many things unnecessarily. The simple solution was already in place before Aug 2009. Those who want the products absolutely free, should go directly. Those who routes through Agents/Advisors they will pay the inbuilt entry load.

Isn't this the SIMPLEST SOLUTION ?


Deepak R khemani

In Reply to santosh roy 6 years ago

Did you think that Indian Regulators are here to simplify things?
They are there to make things so difficult that the weak agents will go away immediately, the not so weak will be around for a few more years,and only the strongest will survive.

Melvin Joseph

In Reply to Deepak R khemani 6 years ago

Yes, most regulators in our country are here to make things complex. If people can buy all other things through online, they can do it for mutual funds also. For others, who really want the services of an agent, there is nothing wrong in having an inbuilt load of 1-2% to compensate the agents. Regulators and policy makers have to try to involve custmers bulk participation in MF rather than killing the industry.


6 years ago

Unnecessarily SEBI is proposing to bring some additional rules and regulations for the betterment of investors.But the truth is that all these complicated rules will not make Mutual Fund Industry to grow.Today our stock market is suffering because of the FIIs who are selling stocks like anything.They are only making money and Indian investors are remaining at lurch seeing that they are investing and others are taking profit out of that.It is a matter of regret that SEBI have never emphasised on the point that investors require advice from certified Advisers.SEBI should come out with advertisement saying that "Mutual Fund products are specialised schemes for investment and all should consult Certified Financial Advisers before makeing investment."It should alert investors to check the authenticity of the Financial Advisor before taking advice.


6 years ago

Thank you for bringing an awakening article on SEBI's recent proposal. Investor as well as "agents" should be made aware of the fact that mutual funds are not simple saving instruments like Insurance or Small savings. Equity as well as Dept markets are getting complicated by the hour due to globalisation as well as FII's influence. If Mutual Funds are promoted as specialised products and not as a run-of-the-mill me too products then both the investors as well as advisors would realise the importance of knowing their mutual fund fully. SEBI should not only embark on an intensive awareness campaign through out the year in vernacular in the local media and through popular tv channels. A slogan
like this " MUTUAL FUNDS ARE SPECIAL PRODUCTS. IS YOUR ADVISOR QUALIFIED". The present problem lies in equating the sales of mutual fund with that of Insurance and Savings product where discounting by the agents is the norm than an exception.


6 years ago

When I take an FD from a Bank or private company, Ii do not pay commission. When I buy a fridge or TV I do not pay commission. Why should the investor's money be defrayed in the form of commission, when it is mutual fund? If the advisor does not want to sell mutual fund, let him be. He cannot demand commission. But he should be allowed to charge a fee from his client (the investor) for the services rendered by him. This will allow market mechanism to operate in this hitherto unrestricted field of activity. As long as he does not depend on commission from the fund house, the advisor will not be tempted to sell the wrong products to his investor. The advisors have had a good time till now - it is time they also get their act together and really earn their fees by providing well-researched advice to their clients.



In Reply to B V KRISHNAN 6 years ago

Dear Mr.Krishnan,

Of all the moronic and imbecile messages I have read in Moneylife on the issue of commission, this one would rate right at the top.

Sir, what happens when you put money in a fixed deposit in a bank? You are getting interest. The bank is getting your money to make more money for itself. Have you ever questioned the bank what returns they have earned on the money you have lent them? Today, the rate of interest on FDs is about 9%. What if the banks earn 15% on their investment? Are they going to give you that kind of return? So you know where they are making money? And they dont even tell you about this!!!

The MRP of the fridge, another example you have quoted is made up of Manufacturing cost+ profit to the manufacturer+ duties paid to the government in the form of Excise and octroi and sales tax+ transportation charges+ Shipping agents commission+ Warehouse charges+ Dealers Commission. Going by your argument, imagine a situation, where the truck driver, the wholesale depot owner, the government clerk, the shipping agent and the dealer standing in front of your door asking you for their fee or commission or charge because you believe in paying only the actual cost of the product!!! Is it practical?

Hilarious it sounds, aint it???

Today I went to close on insurance sale to a person in his thirties, who earns an annual salary of of Rs.35 lakhs +. He wanted to put some money in a child insurance plan. We had discussed and debated, in detail, a number of things, over e mail, on phones and personal meetings. I had met him six times to give him all the details he wanted. Comparisons were drawn across companies & across products, premiums of different plans, illustrations ... in short everything was done by me to "earn my fees". Finally, at the time of closing, he says " my friend in Bihar is also an insurance agent and he has promised me that he will pay the first three month's premium on my behalf, I will consider buying the policy from you only if you agree to match that offer".

I will tell you, the premium he was paying was Rs.60,000/-. The commission the insurance company gives on this product is 25%. Which is Rs.15,000/-. And he wants me to pay Rs.15,000 from my pocket to get business from him!!! Doesn't that sound wonderful?? You spend time, you spend money, you take efforts to educate him. And in the end not earn anything???

Now you tell me, what fee can an advisor collect when the mindset of a person, who is educated, earning a very high salary, who has been abroad for the last ten odd years, who stresses that he needs quality service and never misses an opportunity to mention hwo good things were back home in USA, does not go beyond the level of seeking rebate???

If I had told him my fee is Rs,10,000/-, do you think he would have paid it???

Looking forward for your reply


In Reply to Manoja 6 years ago

Mr.Manoja, my comments were about Mutual Funds, not about insurance policies. It would be better if you read the comments carefully before jumping to make wise-cracks.


In Reply to B V KRISHNAN 6 years ago

Agree, your comments are for mutual funds. But here I am talking about the mindset of an individual. When they know someone else is paying our commission/brokerage, they want a cut in it. If it is a case where they have to pay on their own, they never do.

Also, pray enlighten us, what you would do if the whole army of people who play a role in getting a fridge from the manufacturer to your doorstep come and demand their share of money from you??


In Reply to B V KRISHNAN 6 years ago

First and foremost you should understand that no body does business for charity. Let it be a FD or Fridge or TV the cost is inbuilt. Same is the case with all the Financial Products. Every product has a cost of marketing. No one is against meaningful regulations. Why Regulations are brought in a haste is the question
. From your comments I find that the understanding of financial products has not gone to the investor so the priority of the Regulator should be for Investor Education. Which Money Life is doing on a grand scale. Kindly do attend their programs to enrich one's knowledge.


In Reply to Srini 6 years ago

I am not against the financial advisor earning his living. My only objection is to the fund house paying commission. Let him collect his fees from the client. Yes, everything has a cost inbuilt into it. But here the client does not have a choice. He has to pay/bear the commission irrespective of the advisor he chooses to do business with. Advisor has no accountability to the client. This has to change.


In Reply to B V KRISHNAN 6 years ago

The client has all the choices in the world to pick or choose his advisor. If you feel that the advisor has to collect his fee from the client then the same has to happen for all the products. As per your earlier example of FD the fee is adjusted as sales cost. When you buy a Fridge the same is adjusted in the MRP. So when the advisor gives a mutual fund product the cost is adjusted in the overall fee charged to the scheme. I dont know whether you are aware of the expense ratio of mutual funds. In the advanced country like the US there are front load funds. If the investor is very savy he still has the option to go directly to the fund. Accountability is required for everyone, so it is very important for the investor to choose the right advisor. That is all the more reason why the Regulator should implement effective Investor Education programs.

Rajesh Bhatia

6 years ago

I think instead of defining advisor/agent our regulators should focus on educating and imparting knowledge to financial intermediaries, educate and do awareness program for investors. secondly at present there are a lot of regulators which creates disparity in the system .I request finance minister to please think about bringing all the financial intermediaries under one roof and like FPSBINDIA the focus should be on education, ethics, experience. Every intermediary is to be held accountable for what he sells or advice moreover things has to be on black or white. Other wise it will remain a discussion point for our elite class.

Melvin Joseph

6 years ago

First of all, let me clarify that I am not a distributor. But I feel, without any commission, we cannot expect anybody to sell anything, that too a financial product. If insurance industry can pay huge commissions, there is nothing wrong in giving 1% upfront commission and a 0.5% trail commission to the MF distributors.The caution are is switching. There should not be any commission while switching to ensure wrong practices by agents. Another important area is investor education. This industry will survive only, if the retail investors are attracted to it. Now the MF industry is confined only to select cities and very few above middle class people. Why not the regulator initiate meaninful customer education initatives to attract the middle class from all over the country to it. This can even help reduce our dependance on FIIs.I don't recommend a daily customer education series advertisement in Economic Times which only will be read by the above few people.We have to reach out far and wide, where the real India lies. If it is done, the higher volumes will ensure a decent living for an agent even @1% commission,who inturn will work more.
Lot of clarity and field realities are missing among those who are sitting on the Top to take decisions.

tushar chhaya

6 years ago

I don't think selling MFs for a fee is such a bad idea.

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Establishing standards for effective management information systems for MFIs

A good MIS is absolutely necessary for MFIs to manage the interface with clients and conduct activities/processes in a manner that is efficient, effective and transparent

Understanding the state of management information systems (MIS) in Indian microfinance institutions (MFIs) is very important for all stakeholders involved in Indian microfinance, and many of the issues that came up in the 2010 crisis concerned data, or the lack of it. Therefore, it is especially critical for the proposed microfinance development and regulation bill to ensure that MFIs meet certain minimum MIS standards in order to get accredited and/or licensed.

So what then are the various aspects that need to be emphasized as part of the minimum MIS requirements in the proposed microfinance bill?

Let us first understand why MIS is very important in microfinance. At the MFI level, building an efficient/effective MIS helps to manage data, information processes and activities and this is especially crucial given that microfinance involves a large number of clients with small loans with miniscule and highly repetitive repayments. An appropriate MIS also helps the institution better understand client needs, and thereby enables it to serve them with appropriate products, tailored to their cash flows. A good MIS is, therefore, absolutely necessary for the MFI to manage its interface with clients and conduct its activities/processes in a manner that is efficient, effective and transparent.

While many MFIs claim that they have an appropriate MIS in tune with global best practices, there are examplesi  to the contrary, and I quote Anna Somos Krishnan, a seasoned microfinance professional, who wrote in a candid article (21st August 2010), soon after the first Indian microfinance IPO:

"Interestingly, the authorities, this time, have given the green signal for an entity that can't prove its operational strength beyond, perhaps, its head office and a couple of system generated reports. Let's face it. SKS, till date, manually reconciles the majority of its 2,000-odd branches data and its seven million clients at the end of each month, despite the unprecedented IT investment that it made four years ago. These are the three-four years when we see the largest scale of growth in an entity. What is thought-provoking, though, is the virtually non-existent digital and automated management information systems (MIS) for trustworthy record-keeping (this means that, with one or two exceptions, MFIs have no IT systems to reliably track customer transaction data)."ii 

If what Anna Somos Krishnan has written is indeed true, then, the situation is very serious. It certainly merits the attention of various stakeholders, including the Reserve Bank of India (RBI), which is to become the sole regulator of microfinance. Without question, the regulators/supervisors would need to analyze and understand the actual state of MIS in Indian MFIs-as they are intermediating increased sums of money and dealing with a larger number of clients-in order to prevent crisis situations in the future. The key questions that need to be asked in this regard are:

1.    Given that microfinance involves large numbers of small repetitive transactions, how are Indian MFIs currently managing data and information on their clients, products, processes and activities?

2.    Do they have a fully automated MIS, or are they still completely manual, or are they using hybrid systems? Are there differences between larger and smaller institutions, for profit and not-for-profit institutions, etc? Are there challenges that Indian MFIs face with regard to implementation of robust MIS systems? What are these and how can these be addressed?

3.    Are management information systems (in Indian MFIs) integratediii  in real time across products, processes, client segments, branches and functions (like accounting and portfolio data)? If yes, how do these systems perform in real time in terms of reliability and validity of data used/generated as well as time taken for analysis and production of reports? If no, how are the MFIs, and especially those with a large number of clients and rapid growth rate, managing the crucial integration and the reliability/validity of their integrated data?

4.    Are all features/aspects of all products, for all clients in all locations available in the MIS (manual or computerized or hybrid)? What is the reliability and validity of this primary data and/or analyzed information in terms of reflecting the ground reality (accuracy mainly)? For example, there were news reports in November/December 2010 that the Andhra Pradesh government claimed, that one of the MFIs was supposedly charging 60.5% and the MFI replied saying this could have been due to an error in the conversion of data. This concerns the reliability and validity of the MIS.

5.    Is the data provided (or information/reports generated) by the MIS sufficient (for various stakeholders) in terms of content, frequency and timeliness, so as to give a meaningful picture of the MFIs' true financial position/condition and prospects? Is it suitable for decision-making and risk management from an institutional perspective?

6.    Is the data/information/reports in the MIS comparableiv  to that in other institutions and as per good practices (as well as regulator/supervisor) norms?

7.    Is data from the MIS consistent with financial and other statements that the MFI generates and uses internally to measure, manage and monitor its portfolio and other risks?

8.    Is the data from the MIS consistent with the financial and other statements that the MFI generates and files with concerned regulators on a periodic basis?

9.    Do the management information systems of Indian MFIs have transparent business rules in line with good practices, as well as regulator/supervisor norms in critical areas such as (but not limited to) :

  • Asset classification and provisioning-Including methods for determining quality of (loan) assets and related indicators (portfolio at risk, provisioning ratios, etc). Some relevant aspects here are.

 Transparency and verification must be possible with regard to the sequence of appropriation of client repayments, which needs to be as per good practices standards and regulator norms. The sequence in which client repayments must be appropriated should always be as follows - fines first (if applicable), then penal interest (if applicable), interest overdue, then interest due (if due on the date on which repayment comes in), then principal overdue and lastly, principal. If principal is appropriated first, then, while portfolio quality would appear better, the yield on portfolio would reduce and so would the profitability/sustainability of the MFI.

 The method of calculating age of a past due loan, should be through recommended best practice proceduresv .

Grace periods (in terms of days or number of installments) and the specific processvi  used by the MIS for calculating various portfolio quality indicators (like 'portfolio at risk' or PAR) must be clearly discernable and/or transparently stated, if hard-coded in the MIS. For example, client repayment could be over 46 installments across a 52-week loan term-this means that at any time, a client could have skipped six installments and still not be classified as a past due account. This has serious implications for asset classification and provisioning and it needs to be recognised. Therefore, unusually long grace periods, or repayment moratoriums, must be stated upfront in a transparent manner.

There must be standard good-practice procedures for regular monitoring and management of past, due or impaired assets/credit relationships, evaluating the adequacy of credit (loan) loss provisionsvii  and credit (loan) loss allowances, etc.

  •    Accounting policies and practices - The policies and practices followed in the MIS must be as per good practices standards prescribed by the regulator. The integrationviii  of the accounting, portfolio and other modules must also be done through a transparent process and as per regulator norms.
  • Total cost to client - The total cost for various products (interest rates, fees, all forced conditions, including credit insurance, etc) must be transparently available in MIS and capable of being compared with actual portfolio yield and/or earnings of the MFI. This will help to highlight any hidden interest charges and costs that clients often claim to pay to MFIs - an issue that has come up regularly during the 2010 micro-finance crisis
  •  Other aspects - There must be clarity and transparency in MIS with regard to risk-management aspects, including controls, ALMix  issues, exposure norms across products/regions/sectors/clients etc

10.    Given all these aspects, what are the minimum MIS standards that have to be set for enabling accreditation, and/or licensing of MFIs as per the proposed microfinance development and regulation bill?

Without question, there is a critical need to establish minimum standards for certain non-negotiables like MIS, in Indian MFIs. The Union Ministry of Finance (MoF) and the RBI should utilize this opportunity to draft the microfinance development and regulation bill to enable the microfinance industry to 'arrive' in terms of having transparent, integrated and comprehensive management information systems that really work on the ground. This indeed is a crucial first step, even before we talk of a national credit bureau, as only then would the proposed credit bureau be able to have reliable and valid (MIS) data, so necessary for reducing the occurrence of multiple, ghost and over-lending by Indian MFIs.

  iThe example of SKS is being used for illustrative purposes and I would like to state that from my own knowledge of MIS in the Indian micro-finance industry, the SKS MIS is perhaps one of the better operating systems in the Indian microfinance industry.
 iii From the perspective of users of information and enabling them to make meaningful evaluations/decisions, information from MIS should be comprehensive in terms of aggregation, and consolidation and assessment of information across products, processes, client segments, geographies and activities.
  ivData/information needs to be compared across institutions and over time. Hence, standardized procedures must be used to develop the MIS and standard definitions of indicators, and standard methods for calculating the same must be rigorously followed. This does not imply loss of flexibility, but rather suggests standard use of best practices-oriented indicators and methods for portfolio quality measurement. This is often reflected in the methodology of developing the business rules.
  vWhere age of past due loan = date of calculating age - earliest unpaid overdue (in days). Using the installment method of ageing requires adjustments to be made as this method understates age of past due loan, after the loan term and overstates age of past due loan within the loan term.
 vi While selecting past due loans for calculating portfolio at risk (PAR) of any age, the reference point is to choose every loan that has either fines, or interest, or principal overdue. Technically, it is possible to have past due loans with 'zero' principal overdue and some interest/fines overdue, and hence, using only principal overdue to determine aggregate loan outstanding of the past due loans could actually understate the risk in the portfolio
 vii In case of ageing with weekly/daily installments, define age categories based on number of installments skipped, rather than in days. This is to ensure appropriate provisioning. For example, in a weekly payment model, < 30 days past due could actually be 4/5 installments skipped. For example, the traditional 10% provisioning would not be appropriate here and a much higher provisioning may be required, depending on the context and actual ground situation.
  viiiEnsure automatic integration of portfolio and accounting modules, in that data entered in one, for example loan disbursement through the portfolio module, automatically gets reflected in the other, as loan outstanding under assets in the balance sheet. This is very critical.
  ixAsset and Liability Management

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments.) 




6 years ago

MFIs have failed / failing because of greed and not because of not having a good a MIS. MFIs have attitude problem.

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The Scam
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