Why should MFIs join hands with Sa-Dhan? Open letter to Sa Dhan

Open Letter to Sa Dhan by Abhijit Subudhi of Dhanei KGFS

Why should MFIs join hands with Sa-Dhan ?

19 MFIs have joined their hands under the umbrella of Sa-Dhan to project the transparency of the industry practices to the outside world by way of self imposing disclosure norms 10 years ago. Currently 229 MFIs are part of the Sa-Dhan and its outstanding portfolio has reached Rs 5954 crores with the outreach of 14.1 million clients by the end of the year 2007-08.

But is it advisable for the MFIs to pool themselves into the basket of SA-DHAN or be an independent individual body?

Does their membership provide adequate relaxations to make their life easier ?

A series of interventions have been proposed in the Microfinance Bill 2007-08.

1.Setting up of Microfinance Development and Regulatory Council to formulate policies, schemes, operation guideline and such other measures that are required in the interest of orderly growth and development of the microfinance sector that shall be binding implementing agencies under the Act. The council shall also formulate policies with regard to Microfinance Development Fund and micro-finance technology fund.

2.Inclusion of all legal forms that are engaged in the provision of microfinance activities including Section 25 companies under the purview of this bill. Specifically, it was recommended for those including section 25 companies whose principal business is to provide microfinance services with 80% of their total financial assistance outstanding with the eligible microfinance clients and 80% of the clients are eligible microfinance clients.

3.Stringent norms for thrift collection. It was recommended that microfinance organizations must ensure that not less than 80% of their total financial assistance should be with the eligible microfinance clients and not less than 80% of the total umber of clients financed by them should be an eligible microfinance client. It was also recommended that Net owned fund should be Rs. 25 lakhs and 15% of the thrift outstanding should be transferred to reserve fund and in case of thrift collection is in excess of outstanding portfolio, the entire surplus shall be transferred to the reserve fund.

4.Exemption from State Usurious Loans/ Money Lenders Acts – It was recommended that to make a declaratory provision in the bill that the State Money Lender law shall not apply to the microfinance organizations.

Some of the other suggestions were:

  • It was suggested that microfinance institutions should declare their effective interest rate including all the charges, at least annually in public. In addition, the microfinance institutions should make all their accounts public. Supporting this, transparency in operations was also suggested
  • On thrift collection it was opined that total asset of the thrift service offering entities should be two times of their Net Owned Fund
  • Granting certification to MFO: a clear time frame needs to be specified. In case of rejection of application, the MFO should have provision to re-apply with suggested improvements. While forwarding application, the Bill should clarify that it should be submitted to the regional office. This will provide the knowledge and understanding on the organizations and avoid many time lags.
  • In the context of issues related to protection of the clients from the malpractices and fraudulent institutions, it was suggested in accordance with the earlier proposal of the sector that microfinance organizations or institutions under the Bill must ensure that 80% of their total financial assistance outstanding should be with the microfinance clients and 80% of the total number of clients financed by them should be microfinance clients. Further the minimum capital requirement of Rs. 500000 for a MFO to be eligible to collect thrift should be revised and raised.

Possible Issues:

  • It is true that all these interventions if sanctioned will improve transparency in the     microfinance sector but does not it restrict the freedom of the micro finance institutions. It limits the working areas in to certain boundaries. The prime reason behind the success of the micro finance sector is adoption of flexible strategies depending upon client requirements but the standardized norms of Sa-Dhan will necessitate the MFIs to make changes in their strategies which may even challenge the survival of small MFIs.
  • There is a high probability that the big firms in the industry will have a SAY power in the community.
  • Life for the start up MFIs can really be very difficult as they have to accomplish with the same norms as the bigger ones which have large scale operations. These Multiple interventions will increase the operating cost that will ultimately get shifted on the part of the borrower, and it may impair their competitiveness in the market place.

Given the light of above practical issues, the relevance of the Sa-Dhan as the promoting body of MFIs has to be studied and following questions have to be addressed for the betterment of the Microfinance industry.

  • What is the role of Sa-Dhan as the nurturing body of start-up MFIs?
  • Why should MFIs not venture into Blue Ocean with their flexible strategies, low operating costs, higher profits and more importantly serving borrower needs?
  • How does the membership of Sa-Dhan add value to the ultimate borrower (in terms of asset base and household incomes)

Why should the micro finance institutions be part of this sky? All these complications will bring up the operating cost of transactions which ultimately is to be borne by the borrowers. Why such interventions when the whole purpose of micro finance [easy access to finance] is disturbed?


What it requires Sa-Dhan is to pull it socks and act aggressively to nurture the small and start up micro-finance institutions before bringing them into the same platform. Stringent norms need to be normalized for the start ups to add strength to its survival.

Various research centers should put themselves in the shoes of the start ups and indulge themselves in finding out quick measures as well as relaxations in policies that need to be taken care of in order to protect the interest of the small and start up MFIs.

The Author of this document can be contacted at abhijit.subudhi@dhaneikgfs.co.in

Source : Recieved via email

To Top