Lenders Forum begins standardising loan contracts, aims at transparency.
Lenders to micro-finance institutions (MFIs) have started auditing the latter’s loan portfolios to check the end-use of funds and improve transparency.
Public and private banks floated a Lenders’ Forum a month ago under the Small Industries Development Bank of India (Sidbi), which coordinates and provides the secretarial organsiation. It had commissioned audit agencies to examine the loan books of three-four large MFIs, P K Saha, Sidbi’s chief general manager said at the Srijan Financial Inclusion Summit on Thursday.
More MFIs would be covered in phases. Besides checking the end-use of funds, the exercise would provide information on the health of the portfolio. The work is part of a project funded from a $300-million (Rs 1,340 crore) World Bank loan to Sidbi. The objective of the credit line is to scale up access to sustainable microfinance services, besides introducing innovative financial products and fostering transparency and responsible finance.
Saha said the forum has had two meetings. It is developing covenants (common contracts) that all lenders will use while giving loans to MFIs. Such standardised formats would improve information disclosure and decision-making.
The microfinance sector has grown at a high pace for the past five years. At the end of March, MFIs in India extended credit worth Rs 21,500 crore to 24 million clients. The high growth has thrown up certain issues. Transparency in operations to improve working and the decision-making process was important, the Sidbi official said.
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MFIs had inadequate internal controls and there was a lot of scope to improve on this front. Keeping this in mind, Sidbi had laid thrust on responsible financing, he said.
Under the World Bank credit line funding in the form of long-term debt, equity and quasi-equity instruments will be made available. This would be linked to transparency and good governance.