Money & Banking
Lessons from the Indian microfinance crisis, an open letter to Andrew Mitchell

Two crucial aspects in microfinance—client origination/targeting and loan appraisal—have been neglected in favour of unprecedented growth (caused by a desire to fully commercialise microfinance and rapidly enhance access/outreach of such services) and this has resulted in the present crisis

An open letter to the right honourable Andrew Mitchell, UK International Development Secretary, on lessons from the Indian microfinance crisis

Respected Sir,

Good afternoon! I am delighted that The UK Department for International Development (DFID) is launching SAMRIDHI (a programme promoting microfinance and impact investment in India)  in partnership with SIDBI in your esteemed presence (Sir) at 6pm today, the 16th December (Friday) at the British Council Division, Kasturba Gandhi Marg, New Delhi. Much as I wanted 

to attend the same, I am unable to do so and hence, this open letter Sir for your kind consideration and necessary action.

Sir, I wanted to draw your attention to some key lessons and findings from the Code of Conduct (CoC) assessments of eight Indian MFIs sponsored as part of the SIDBI World Bank “Scalling up Sustainable and Responsible Microfinance Project” ( The findings are very relevant to the SAMRIDHI programme to be launched as noted above.

Sir, in an earlier article (Have sophisticated thermometers ever reduced the temperature?), I pointed to some real peculiar findings from the above Code of Conduct Assessment (COCA) reports where by the fastest growing NBFC-MFIs received the higher (better) scores. This was counter intuitive because it is now widely accepted that burgeoning growth of MFIs caused the 2010 microfinance crisis in Andhra Pradesh—a state which DFID can take great pride in having nurtured significantly through its seminal poverty alleviation and rural livelihoods projects.

Sir, this peculiar fining made me go deeper into the COCA assessments—and not to my surprise, I found that there were too many free points that were awarded as part of the COC assessments (The award of free points in microfinance code of conduct assessments). I must also record that I came across several instances of subjectivity and inconsistencies in the aforementioned COCA reports (Subjectivity and inconsistencies in microfinance code of conduct assessments). I would be grateful if you can read these carefully as they have tremendous implications for DFID’s work globally in relation to microfinance, financial inclusion and inclusive growth! Thank you sir!

And through this open letter, I also wanted to share some key findings from the aforementioned COCA reports. This again should prove extremely useful to DFID not only in its fight against global poverty but also for the SAMRIDHI programme that is being launched today!

Sir, all along I have been saying that two crucial aspects in microfinance (client origination/targeting and loan appraisal) have been neglected in favour of unprecedented growth (caused by a desire to fully commercialise microfinance and rapidly enhance access/outreach of such services) and this has resulted in the present crisis. The above eight COCA assessments present additional evidence in support of my above assertion and I briefly summarise the key issues hereafter for your kind understanding:

a)    On client origination and targeting, it has been found that unauthorised agents were very much present in the operational areas of (some) MFIs. Further, the COCA reports themselves suggest that Ujjivan, Equitas and Basix have used unauthorised agents to source and target new clients. Further, according to the COCA report, Cashpor is said to have experienced this in the past (at least until 2008). While no cases were found at Arohan, the COCA report concludes that Arohan needs to apply internal check systems at all times so as to prevent the risk of informal agents (existing in their operational areas) from infiltrating into their system. And the assessments found no evidence (with regard to use of agents) at SKDRDP, Bandhan and ASA. Not surprisingly, Ujjivan, Basix and Equitas are among the fastest growers (between Apr 2009 and Sept 2010) in this group of eight MFIs for whom COC assessments have been attempted by the SIDBI World Bank responsible micro-finance project.

This apart, the COCA report on of one MFI ( shows how the use of unauthorised agents evolved and this affords very valuable lessons for DFID:

“From November 2010, the organisation has done away with sales targets as well as the direct monetary incentives for enrolment of clients for its Sales Officers to reduce the likelihood of the Sales Officers misrepresenting indebtedness of clients. ... In the past, Equitas has faced problems pertaining to involvement of unauthorised agents in the client origination process, particularly in some of the branches of Chennai, primarily on account of high sales targets of the SOs and weaker controls.”... “In M2i’s opinion, despite all sincere efforts, some of these agents may still be in existence (though their influence may now be low)”. (Pages 6 and 7)

And a reading of the above COCA report clearly shows that only a crisis could incentivise the MFI to change it is policies. The findings given in the report are best interpreted as follows:
  •   The MFI had ‘high sales targets’. (, page 7)
  •  The MFI had ‘direct monetary incentives for enrolment of clients for its sales officers’. (page 6)
  •  There was a ‘likelihood of sales officers misrepresenting indebtedness of clients’. (page 6)
  •    The MFI ‘faced problems pertaining to involvement of unauthorised agents in the client origination process, particularly in some of the branches of Chennai primarily on account of high sales targets of the sales officers and weaker controls’. (page no 7)
  •  The MFI had an ‘incentive for collections at the branches and there was a monetary penalty in case collections are not 100%’. (page no 14)
  •   And interestingly, what needs to be noted from the COCA assessment is that, the MFI still received a score of 7.6 out of 9 on client origination and targeting and it also had the highest overall score (88%) in the pool of COCA assessments (please look at Annex 1 page 18 and Section 1: Scores and facts in the above report, page 2).
  •  I leave it to you as the reader to judge whether this COCA rating is indeed appropriate?

Therefore, it becomes clear that the above not-so-appropriate practices were changed only due to the 2010 crisis and herein lies the most important lesson from Indian microfinance that DFID should not ignore:

b)    Likewise, on loan appraisal, the Ujjivan COCA report says:

“At present, information pertaining to income, expenses as well as indebtedness of the clients used for credit analysis is what is self reported by the clients. Given the profile of its clientele, it may not be possible for the organization to obtain documentary evidence of the income, expenses and indebtedness.” (, page 11)

Sir, this is the omnipresent reality in microfinance as MFIs typically work with poor clients in the informal sector. Some MFIs use tools (like housing index, asset means test, PPI tool) to estimate the income levels of the clients. But it is impossible to get the exact information from a poor household operating in the informal sector.

The only way to get a better insight on the loan absorption and repayment capacity of the clients is to invest in a long-term relationship with them. However, this requires considerable time and may not deliver the best financial results for the MFI in the short term (but from a longer term perspective, the clients will be better off and that is what ultimately matters). And, most importantly, this calls for a strict “no” to use of unauthorised agents in client origination and targeting so that a good direct relationship can be built with clients. And according to the COCA report, the only MFI that seems to have invested in such a relationship is SKDRDP:

As the COCA report says “The SHGs are required to conduct weekly meetings and undertake compulsory savings for a minimum period of three months before they become eligible to undergo the process of grading. Only SHGs receiving satisfactory performance grades are eligible for applying for loans.” (, page 7)

Yet Sir, it is ironical the SKDRDP has received the lowest COCA score! C'est la vie!

Sir, in summary, in many MFIs that had an emphasis on rapid growth, loans were disbursed (indiscriminately) at the fastest rate possible. And greening, informal collateral and abusive collateral substitutes (Tackling informal collateral and collateral substitutes in Indian microfinance) were used to collect back the loans – primarily because the agents behaved like local level thugs. Not enough time was taken by the MFIs to really get to know the clients and to be able to assess their (true) capacity to service the debt. The case of BASIX, which is generally known as one of India’s better MFIs, amply demonstrates this. The fast growth trajectory prevalent in the Indian micro-finance industry (much of BASIX’s peer MFIs in Andhra Pradesh grew at much faster rates than BASIX, prior to 2009) perhaps pushed well intentioned organisations like BASIX (which had sound lending systems originally and I can vouch for how good it was in its early years as an NBFC) to sacrifice their proper lending methodology – that is why as the M2i report on Basix argues,

“However, it was observed that the practice of recording the existing loans of clients in not uniformly practiced across all the units. We found during client interviews that some of the clients had borrowed from other MFIs but this had not been recorded in their loan forms. In one of the units—Kamareddy in Andhra Pradesh—a random inspection of 15 loan appraisal forms revealed that none of them had a mention of any other lender. It is improbable that none of the clients would have borrowed from any other MFI in the region given the prevalence of MFIs. Also, interviews with the LSPs revealed that nearly 70% of his clients had borrowings from other MFIs.” (, Page 12)

And this is confirmed by none other than the then CEO of BASIX, who candidly said to The Economic Times,

“That (following sound lending practices) is where we failed,” says Sajeev Viswanathan, CEO of Basix. MFIs lent liberally to individuals who didn’t have a corresponding ability to repay. The mismatch had to hurt sometime, and that’s what is happening now. ...Mr Viswanathan says MFI lending in Andhra rose from Rs5,000-Rs6,000 crore in 2009 to Rs9,000 crore this year. ” (From Microfinance: What's wrong with it, by M Rajshekhar, Economic Times, November 2010)

Sir, all of the above is fine but what then are the positives from the SIDBI-World Bank sponsored COCA reports? After having analysed eight assessments, the most positive aspect that emerges is the fact that the presence and use of unauthorised agents in Indian micro-finance has now been (officially) acknowledged and admitted. I say officially because of the COCA reports are sponsored by the SIDBI-World Bank project and that puts these findings in a different plane altogether.  And M2i, SIDBI and the World Bank certainly need to be complemented for their courage to bring the (widespread?) use of agents in Indian micro-finance officially out into the open. Kudos to all of them!

A major disappointment however is the fact that those MFIs engaged in such (undesirable) practices have been rewarded with highest scores for Code of Conduct Compliance. As a result, not much value can be attached to the scores resulting from the assessments. And without question, as J Nunnally, the Psychometric Guru would argue, the COCA tool will need significant revamping for it to become a reliable and valid psychometric measure, capable of portraying ground level reality in an accurate and unbiased manner. And given that Sa-Dhan and MFIN have just released a joint code of conduct in Indian microfinance, it is only natural that they take on this task of creating an appropriate tool—one that rewards actual implementation rather than glorious intentions on paper.

Sir, coming back to the SAMRIDHI, a programme promoting microfinance and impact investment, I have tried my best to present you with relevant facts and details (in the public domain) with regard to the practice of microfinance in India. I would be very grateful if you can use your good offices to ensure that the available lessons and learning are factored into the implementation of the DFID SIDBI SAMRIDHI programme (being launched today) as well as the DFID Poorest States Inclusive Growth (PSIG) project that is to be implemented in the near future! And please be rest assured sir that your kind intervention will not only enable millions of low income people in India to have a better quality life but also be an integral part of the inclusive growth story in India!

Thank you sir!

With best wishes


Ramesh S Arunachalam


Halt in rate hikes by RBI on expected lines: PMEAC chairman

“The impact of the base effect will be seen as food prices generally come down in winter season... so I do believe inflation will come down sharply and that might provide the correct environment in which the RBI can act further in the direction of easing action,” PMEAC chairman C Rangarajan said

New Delhi: Prime Minister’s Economic Advisory Council (PMEAC) chairman C Rangarajan today said the Reserve Bank of India’s (RBI) move to keep all the key policy rates unchanged in its mid-quarterly policy review is on expected lines and the central bank might start revising downwards its monetary stance only if inflation continues to decline further, reports PTI.

“...the move is on expected lines...if inflation continues to show a declining trend, then perhaps the RBI will start reversing its policy. Therefore, it is predicated only on one assumption and that is the inflation going down,” Mr Rangarajan said.

He added that inflation will start declining, “particularly food prices will come down more sharply as we have indicated, not only in December but in January as well”.

“The impact of the base effect will be seen as food prices generally come down in winter season... so I do believe inflation will come down sharply and that might provide the correct environment in which the RBI can act further in the direction of easing action,” he said.

In its policy review today, the RBI maintained repo (rate at which banks borrow from RBI) at 8.5%, and reverse repo (rate at which the RBI borrows from banks) at 7.5%.

The halt to increase in interest rates comes after the RBI hiked the rates 13 times since March 2010.

The RBI has also decided to retain the cash reserve ratio (CRR), the amount banks need to park with the RBI, at 6%. Industry was expecting a marginal cut in the CRR to induce liquidity in the system to promote investments.

Meanwhile, Planning Commission deputy chairman Montek Singh Ahluwalia declined to comment on the RBI’s policy stance.

“If there is no change (in policy rates), then what is there to comment on. I don’t want to speculate (on the impact of the pause),” he said.

The RBI will make an assessment of its growth and inflation projections for 2011-12 in the third quarter review next month, the policy statement said.


India against freezing duties, removal of farm export control

“The freezing customs duties amounted to the developing countries ceding their policy space and being denied any recognition for their autonomous liberalisation,” commerce and industry minister Anand Sharma said at the G-20 ministers’ meeting in Geneva

Geneva: India on Thursday rejected proposals of some developed nations to freeze customs duties at current levels (tariff standstill) and taking away rights to ban farm exports as a possible way forward on World Trade Organisation (WTO) talks, saying that if accepted it would tantamount to ceding sovereign rights, reports PTI.

“This (freezing customs duties) amounted to the developing countries ceding their policy space and being denied any recognition for their autonomous liberalisation,” commerce and industry minister Anand Sharma said at the meeting of the Group of Twenty (G-20) ministers here.

Mr Sharma, who is here to participate in the eighth Ministerial Conference of WTO, said that any dilution of the flexibilities available under the WTO regime for imposing export restrictions on agricultural items and taxes was ‘unacceptable’.

The WTO negotiations have been stalled due to differences between rich and developing nations on tariff liberalisation and level of market opening.

Agreeing to tariff standstill means a drastic reduction in duties by developing countries like India, as the country’s applied customs duties is below bound ceiling levels.

To augment domestic supplies, India has banned exports of pulses and also imposed quantitative restrictions on outward shipments of commodities like rice and sugar. Besides, India is planning to bring a food security law under which nearly 64% of its population will have legal entitlement on subsidised foodgrain.

The conference, the highest policy-making of the 154-member WTO body, is meeting to deliberate how to revive the stalled talks for achieving a global trade agreement under the 10-year old Doha Round.

Mr Sharma further said, “It was imperative that the WTO while taking up all manner of new challenges does not forget the traditional challenge of development.”

He called for continued solidarity and reinvigorated engagement so that the current impasse in the Doha negotiations is broken and the attempts to replace the development centric agenda are thwarted.

In his intensive consultations with developing and developed countries, to evolve a common position on the way forward on the Doha Development Agenda, Mr Sharma said India views WTO as an institution to provide a level-playing field in the global trade.

At the meeting of the G-33 countries (a coalition of agricultural economies) he urged for ushering in much delayed changes in the current agricultural trading regime which negatively impact the livelihood concerns of billions of subsistence farmers in the developing world.

Mr Sharma also addressed a gathering of delegates of the G-90 (poorest and smallest developing countries) and Brazil, China and South Africa.

The unique grouping of over 100 countries called the ‘Friends of Development’ reaffirmed their commitment to the centrality of development in Doha Round and the need to keep negotiations transparent and inclusive.

The grouping issued a declaration committing their desire to take forward the Doha Development Agenda without deviating or diluting the core of the round.


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)