Proportional regulation model for microfinance market developed

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Microfinance market participants will be obliged to submit to the Bank of Russia their strategic and business plans as well as develop and coordinate with the regulator their ‘product strategies’, i.e. the rules of provision of financial products or services to customers. These and other suggestions regarding the proportional regulation of the microfinance market are provided in the ‘Improvement of regulation of microfinance market participants’ consultation paper published on the Bank of Russia website. This report complements the regulator’s concept regarding gradual implementation of new approaches to proportional regulation and risk-based supervision of non-bank financial institutions.

The report describes a balanced approach to the improvement of regulation of activity of microfinance organisations (MFOs), consumer credit cooperatives (CCCs) and agricultural consumer credit cooperative (ACCCs) that generate different risks. The report also contains a number of suggestions regarding amending relevant legal acts.

According to its authors, excessively soft regulation of this market brings about financial risks, increased debt burden of households, and spreading of malpractices, while excessively high regulatory requirements can lead to lower financial inclusion and the microfinance industry's failure to perform its mission. Therefore, based on the breakdown of microfinance market participants, the report suggests that increased regulatory requirements be applied to microfinance companies (MFCs) as well as large CCCs and ACCCs with over 3,000 shareholders.

Pursuant to the report, a condition can be set for MFOs, CCCs and ACCCs whereby they may need to provide the Bank of Russia with strategic development plans (for CCCs and ACCCs) or business plans (for MFOs) before they are allowed to enter the market. Moreover, MFCs will be obliged to submit business plans to the Bank of Russia every three years and on an ad hoc basis when they intend to change their business model (the scope of services provided). In turn, CCCs and ACCCs with over 3,000 members will have to prepare a new strategic plan for the next three-year period before the expiry of the old one and in case of changes in the shareholders’ community or the scope of services provided. According to the Bank of Russia, this will ensure a scrupulous revision of potential risks that could impede the implementation of a new business project.

Besides, it is suggested that CCCs and MFOs be bound by an obligation to develop ‘product strategies’ that would include information about the scope of service and the mode of its provision, its cost, target audience, potential risks and consumer rights protection measures. It is expected that before new financial services can be provided to customers large microfinance market participants will need to have their ‘product strategies’ approved by the Bank of Russia.

The report also contains suggestions with regard to amendments concerning business reputation of MFO management, the procedure for submission of financial reports by large and small microfinance market participants, division of supervisory authorities between the regulator and self-regulatory organisations in the microfinance market, and others.

The Bank of Russia believes that increasing the competitiveness of the Russian microfinance market is directly related to optimising the regulatory burden of its participants.

2 August 2018

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