Bank of Russia approves basic standard for microfinance consumer protection

A basic standard for protection of the rights and interests of microfinance organisations’ consumers (individuals and legal entities) has been developed by self-regulated organisations, consistent with the regulator’s requirements. The standard sets forth rules for microfinance organisations (MFOs) to follow when working with consumers. Effective 1 July 2017, the standard is legally binding on all MFOs in Russia.

In order to put a cap on MFO customers’ debt loads, the basic standard limits the maximum number of short-term (up to 30 days) microloans a borrower may receive in a single year to 10 (and to 9, starting from 1 January 2019). Furthermore, a microfinance organisation shall be entitled to extend such loan agreements no more than seven times (and no more than five, starting from 1 January 2019). To reduce the borrower's total debt and eliminate relending, the standard imposes a ban on any further microloans until the current one is fully repaid.

Under the new standard, MFOs shall be the first (of all financial institutions) to respond to any consumer queries, within 15 work days upon receipt of such query. This rule is envisaged to facilitate pre-trial dispute settlement, enabling borrowers to apply directly to the microfinance organisation to settle conflicts.

Also included are recommendations for handling applications from individuals with disabilities and procedures for bad debt restructuring.

With the current legislation imposing no direct ban on a range of unscrupulous practices, the standard forbids any coercion to induce consumer preference of a particular service or execute a new agreement with inferior repayment terms for the original loan, as well as MFO employee incentive programmes based on the number of loans issued without regard for actual repayment indicators.

Any cases of incompliance with the basic standard are subject to complaints requiring enforcement action, filed by any involved parties to the self-regulated organisation of which the incompliant MFO is a member.

In turn, the Bank of Russia exercises oversight over MFO monitoring of compliance with the basic standard.

The basic standard will regulate microfinance organisations’ relations with both citizens, small / medium-sized enterprises and other legal entities.