Have sophisticated thermometers ever reduced the temperature?

The hype of the moment in microfinance is undoubtedly to subscribe to all kinds of code of conducts, client protection principles, social performance and other self-regulating initiatives. To set the record straight, had all the stakeholders really subscribed to these in the first place, there would have not been such a crisis in Indian microfinance

The ongoing Microfinance India Summit has a special session titled, ‘Client protection and Code of Conduct: From principles to practice and compliance’. The session is to be held on 13 December 2011 (1.30 - 3.00 p.m - Breakout Sessions). As the session introducer notes:

“One of the key factors that precipitated the AP (Andhra Pradesh) crisis was the accusation that microfinance institutions (MFIs) were employing coercive measures with clients, were not transparent in their pricing and largely profiteering from the poor. While for several years, there has been a growing concern on the issues of client protection, the AP crisis significantly helped in exacerbating the issue. Since the AP ordinance in October 2010, the efforts in the sector towards ensuring client protection have gained primacy. Industry associations Sa-dhan and MFIN have developed their own Codes of Conduct (CoCs), but their compliance has been a major issue. In recent months, through an IFC effort, a Responsible Finance Forum has been instituted which has been working on harmonizing the two COCs. The Codes go beyond client protection and incorporate standards for governance, staff and recruitment policies, data sharing etc. SIDBI has been conducting Code of Conduct assessments of MFIs as a pre-requisite for lending, thereby emphasizing the importance of adherence to code by the institutions. The panel will discuss the next steps towards supporting translation of the codes and principles into practice including building awareness and capacities of MFIs to enforce CoC, raising awareness of clients of their rights and responsibilities, uniformity in compliance assessment, consequences of non-compliance, role of investors and other stakeholders etc., drawing from good examples in India and globally both within the microfinance industry and in the mainstream.” (http://www.microfinanceindia.org/content/35/63/blog.php)

The hype of the moment in microfinance (especially, in India) is undoubtedly to subscribe to all kinds of code of conducts (Sa-Dhan, MFIN), client protection principles, social performance and other self-regulating initiatives.

To set the record straight, had all the stakeholders really subscribed to these in the first place, there would have not been such a crisis in Indian microfinance. What happened is that there was a strong disconnection between policy/strategy and practice at MFIs and many stakeholders including bankers, investors and others (perhaps) did nothing to clean up the stables! They simply turned a blind eye and pretended that all was well and so it seemed until the crisis blew up in Andhra Pradesh. How else could their silence be interpreted? And in the urge to grow, make profits and get investments at a premium and/or tap primary markets, MFIs did not practice what they had supposedly subscribed to in terms of ethical practices and good governance. And the MFIs associations just watched as the situation deteriorated as did the commercial bankers and DFIs like SIDBI (which undoubtedly played a predominant role in the whole Indian microfinance crisis of 2010).
 
As always, the industry and various stakeholders have attempted, post crisis, to salvage the situation through code of conduct assessments. In fact, an advisory company (M2i) has even launched the Code of Conduct Assessment (COCA) Tool in India. According to industry sources, this is a pioneering initiative—a global first in the microfinance domain. It must also be mentioned that SIDBI has commissioned eight such assessments perhaps as part of the SIDBI- World Bank Responsible Microfinance Project and also made them public (http://www.sidbi.com/micro/WorldBankInitiative.htm).
 
The Code of Conduct Assessment (COCA) tool of M2i is said to involve a “comprehensive review of MFIs policies and systems and whether these translate into ethical microfinance practice’. It utilizes the ADDO framework developed by M2i” (http://www.m2iconsulting.com/m2i_coca.htm).

At the outset, the World Bank, IFC, SIDBI and M2i must be congratulated for their desire to bring such a tool. However, given the strategic importance of these code of conduct (CoC) assessments, it also seems imperative to analyse them and examine their objectivity and effectiveness. This is done in a series of articles and should certainly help to focus Tuesday’s session at the Microfinance India Summit with greater precision.

Let us get the context of the COCA tool first as all COCA reports are based on the tool. The COCA tool measures the adherence to the Code of Conduct on four basic parameters:

1.    Approval at the policy level from the board (of the MFI or institution)
2.    Documentation of the guidelines and procedures that emerge from the policy
3.    Dissemination of the guidelines and procedures across the organization
4.    Observance in practice of these guidelines and procedures.

 
(Source: http://www.sidbi.com/micro/COCA%20SKDRDP.pdf)

The results of the eight SIDBI sponsored COCA assessments are very interesting to say the least and without question, the findings are rather surprising.

Table 2 below presents the COCA-scores for the eight MFIs from the SIDBI’s sponsored assessments
  • An immediate observation is that the for-profit fast growing NBFC-MFIs receive the highest COCA-scores. (A higher COCA score signifies a high degree of organisational adherence with regard to the Voluntary Code of Conduct)
  •  The two not-for-profits (a section 25 company and a charitable trust) and low growth MFI’s receive the lowest COCA-scores. (A lower COCA score means that organisational adherence to the Voluntary Code of Conduct is low)
  •  The COCA results —which show that the fastest growing for profit MFIs have the highest COCA scores—seem to be contradictory to the well accepted idea that the fast growth of the microfinance sector has contributed to the 2010 AP microfinance crisis. Surely, something counter intuitive is happening here as the relationship between fast growth and the AP 2010 Microfinance crisis is now well recognised, established and documented. In fact, by November-December 2010, many MFIs had begun to admit that growth caused by over lending was responsible for the crisis and this is evident from the quote of the then CEO of BASIX, one of the pioneering Indian NBFC MFIs:

“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, 2010)

Likewise, Professor M SSriram in his article has noted:

“In about a decade, microfinance has moved from helping the poor to access finance to an interesting business at the bottom of the pyramid. This paradigm shift happened with the entry of funding, initially from Silicon Valley and then from the people who funded and fuelled the growth of Silicon Valley. Somebody from Silicon Valley would typically be an entrepreneur who started small, scaled up fast, used the asymmetries in the market and logically and legally became rich. Many were first-generation entrepreneurs and did not forget their roots. It was logical for them to invest their surpluses into the business of doing good. However, their own success and growth experience dictated that while they do good, they should also do well. Doing well translated into good business plans, targets and also growing at a scorching pace.

All was well for us, within the industry, when the base was small. There were several 100 percents in the microfinance sector. The growth rate was in excess of 100%, recovery was 100% and the sustainability indices quickly crossed 100%. Voila, we had found a magic mantra where the poor could be served, we could look good and put “eradication of poverty” as our mission statement and of course, lead a comfortable life. The alternative sources that were funding the poor made us look like messiahs.

The problem was that we were dealing with people and not processes and systems. This involved group formation and dealing with behavioural patterns of people. But we got addicted to the heady growth target. And when we chase targets without logic, we cut corners. We became cut-throat in competition and we lost a sense of balance. ...The question is whether the lender knows the absorption and repayment capacity of the borrower. It is impossible to know this if we are doing a group meeting in 20 minutes and moving on. It is impossible to address this when we have standardised products and offer a higher loan each cycle. Our credit officers are trained to be robots following a process mechanically and are prohibited to think. Therefore multiple lending is a problem of the MFIs. We clearly do not know our customers enough, and do not have the time to know them.” (What is Wrong With Indian Microfinance by MS Sriram, Forbes, 2010)

A third comment on the relationship between growth and the 2010 AP Microfinance crisis uses a great metaphor—in the words of Alok Prasad, chairman of MFIN, who spoke at the Responsible Finance Forum in the Hague in January 2011, the AP crisis occurred mainly because MFI growth was burgeoning. His analogy was brilliant when he said that

“it was like driving a Ferrari at more than 200km/h on Indian roads which is asking for trouble.” (From comments by Jan Postmus at http://www.microfinancefocus.com/content/global-investors-meet-promote-new-principles-inclusive-finance)

And there are many more such quotes and I could go on but the larger point is that, given the above relationship between burgeoning growth and the AP crisis, I find it rather strange that the COCA scores are highest for the NBFC-MFIs that grew at a scorching pace and they are the lowest for the non-for-profit MFIs that grew a snail’s pace.

The results seem weird, are they not?

http://www.sidbi.com/micro/COCAUjjivan.pdf, http://www.sidbi.com/micro/COCA%20ASA.pdf, http://www.sidbi.com/micro/COCA%20Samruddhi.pdf, http://www.sidbi.com/micro/Bandhan.pdf, http://www.sidbi.in/micro/COCA%20Arohan.pdf, http://www.sidbi.in/Micro/CASHPOR.pdf and http://www.sidbi.com/micro/COCA%20SKDRDP.pdf

This peculiar finding has prompted me to take a closer look at the SIDBI-World Bank sponsored COCA tool (and the results therein) in a series of articles that follow shortly. That notwithstanding, I do hope that tomorrow’s session and panel discussion (at the Microfinance India Summit 2011) focus on the aspect of how the fastest growing MFIs managed a much better (higher) COCA score than their low growth and not-for-profit MFI counterparts? All in all, this session, undoubtedly promises to be an exciting one given the peculiar results from the SIDBI-World Bank sponsored COCA assessments and I hope that the regulators and key industry stakeholders are watching this controversial session closely...

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments)

 

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    What is said at conferences is very different from what is implemented in practice

     It is very easy to talk high flying concepts at conferences and also publicly claim that the same is being applied in practice. In reality, however, much of the intended strategies do not get implemented in microfinance and that is something that conference organizers, industry associations, regulators and stakeholders must take notice

    Good morning folks and as I was browsing through the Internet this Saturday, I came across a very interesting video on the web. It was a video clip of Ajay Verma, the then CEO of Sahayata Microfinance, speaking at the 2010 Microfinance India Summit at a session titled, ‘Risks in Microfinance: Current Environment and Mitigation Strategies’

    Speaking at the 2010 Microfinance India Summit, Mr Verma touched on three themes: 

    a) Managing multiple lending: He said that multiple lending can only be managed if organizations themselves drive their credit policy very hard. He said the key is to have a (good) credit policy, adhere to it and build systems to check that the credit policy is working. He also stated that the proposed industry efforts for a credit bureau will help reduce multiple lending. And he also argued that the high (annual) growth of 100%-300% can be better managed if multiple lending is managed as this will then taper down the growth

    b) Have engagement at all levels: Here he stressed employee engagement through good training— where there would be emphasis of organizational core values and code of conduct— within the institution. He said that MFIs (microfinance institutions) must have a strong and solid agenda to engage with their employees as it is employees who can create engaged customers. He also said that customer engagement must be absolutely transparent and they must be given complete information on products, charges, fees, etc. His cautioned that it would not be enough to merely provide information to customers but rather more importantly to ensure that they understand various facts clearly. For this, he said that engagement through financial literacy would be necessary so that low-income clients are educated on the dangers of debt trap and the need to invest borrowed money in income generation ventures. He further stressed for open engagement with the local authorities, stakeholders and funders so that information can flow transparently to them

    c) Focus on product innovation: He said that 99% of the industry is on a single product and he said that a life-cycle approach must be used to have product innovation. He argued for starting with basic loan and as client income grows, he suggested that MFIs look at education loans, housing loans, etc

    The MFIN website (http://www.mfinindia.org/mfin-leadership) still lists Mr Verma as one of its board members and introduces him as follows: 

    “Ajay Verma | CEO & MD of Sahayata

    Ajay Verma is the managing director and chief executive officer of Sahayata microfinance institution. As a former banking professional with extensive experience in risk management, start-up and product management, he brings into Sahayata 18 years of experience from banks across the world, where he was the head of risk for consumer and SME banking. Ajay Verma has worked outside the country for over nine years with companies like GE Capital.”

    Sahayata is also listed as a partner with Atomtech (http://www.atomtech.in/partners.html) where Mr Verma’s following statement is given: 

    “Sahayata supports livelihood initiatives of women entrepreneurs— they have consistently shown a good credit record and have repaid their loans on time. We seek to work towards the upliftment of underprivileged women; strengthening the social fabric by providing women with financial independence and nurturing their entrepreneurial spirit and self-reliance. In our journey, we are happy to be associated with the dedicated and intellectually gifted team at Atom Technologies; and look forward to optimally utilising their customised mobile solutions for microfinance to the benefit of our customers by providing them with a best-in-class service experience.”

    Well, all is fine with the above statements including the high sounding concepts and strategies espoused at the 2010 Microfinance India Summit (November 2010) by the then MD and CEO of Sahayata Microfinance. What makes the above video very interesting to view is the fact that, barely, within a year (around November 2011) of his making the speech at the Microfinance India Summit, charges of serious misreporting and mismanagement had surfaced with regard to Sahayata Microfinance—which had until then been the darling of so many investors, lenders and stakeholders. 

    And as Business Standard, 18 November 2011 noted, “Sahayata Microfinance Pvt Ltd has suspended the brass, including its chief executive, on charges of mismanagement. …The board questioned chief executive, chief financial officer and other senior managers on charges of serious misreporting and mismanagement. ... While chief executive was suspended with immediate effect, the CFO and head of operations were stripped of their duties immediately. They were subsequently suspended.” 

    The icing on the cake is the fact that Sahayata had also won several awards and recognitions (national and international) for its good governance, innovative practices and the like and readers may want to read a previous Moneylife article that sheds light on this and other aspects with regard to Sahayata Microfinance going astray (Award winning Sahayata Microfinance is the latest to go astray)

    Ok folks, the larger point I want to make is that it is very easy to talk high flying concepts at conferences and also publicly claim that the same is being applied in practice. In reality, however, much of the intended strategies do not get implemented in micro-finance and that is something that conference organizers, industry associations, regulators and stakeholders must take notice of with regard to Indian microfinance. And therein lies the pathway to overcome the present impasse and I sincerely hope that the Indian micro-finance industry recognizes this basic fact and devises appropriate strategies to overcome this serious gap between policy and implementation. And what better place than the on-going 2011 Microfinance India Summit to be a natural starting platform for this introspection with integrity… 

    (The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments)

     

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    The Micro-Finance India Summit 2011

    Beyond all the buzz, when can we embed social performance within practice?

    Social performance is the ‘in’ thing in micro-finance and an entire session is devoted at the Micro-Finance India summit towards the same and a special social performance report is also to be released at the Summit. The Micro-Finance India Summit session is titled, “Beyond the Buzz, Embedding Social Performance within Practice” and the emphasis of the session is described  below 

    Session Outline: Beyond the Buzz, Embedding Social Performance within Practice

    There is a multiplicity of methodologies and indicators which emphasize inclusion of social performance standards in concurrence with financial performance. There is also an emphasis from investors as well as lenders on incorporation of Social performance metrics and on adherence to code of conduct. Against this backdrop, MFIs are undertaking objective steps to manage and enhance their social performance, which range from changes in product features and delivery processes, communication with clients, human resources management practices including emphasis on women supportive work policies, governance, internal audit and control mechanisms, MIS and so on. The Microfinance India Social Performance Report is an initiative to comprehensively document the efforts of MFIs and other players to better manage and report on the social performance based on some field evidence. The session will review the findings of this report and discuss the process and progress of deeper internalization of SPM within the sectoral practice and highlight avenues for the way forward. Source: http://www.microfinanceindia.org/content/35/63/blog.php

    Readers would recall that Moneylife has already commented on this new development in the field of micro-finance. (Microfinance: Will seal of excellence and social performance management as yardsticks work?)

    That said, while it is great to talk of social performance, internal controls and the like, a key question here is: How to enforce this on the ground in a practical sense when you have multiple agents (MFIN-NCAER study: Here’s the proof that microfinance agents are thriving in Tamil Nadu) colluding with fraudulent staff (often hired without serious background checks and practically no training) and MFIs that rely heavily on a fully decentralized model that has all the wrong incentives? (How and why did microfinance agents become a part of the Indian microfinance business?; Implementation safeguards against notorious agents are an imperative for the proposed microfinance bill; and Proposed Microfinance Bill has to look at the centre leader as a microfinance agent

    Further, given that a lot of growth has occurred (and is perhaps still occurring) through outsourcing to agents, where the end user clients may not be strictly traceable, how can social performance be enforced in a practical sense? What lessons can the Indian and global micro-finance industry learn from past efforts to enforce codes of conduct and the like? (We all know what happened after the 2005/6 Krishna crisis in India)

    Also, when simple internal controls (and internal audits) were busted and disregarded during the burgeoning growth phase of Indian micro-finance, which saw the phenomenal rise of multiple lending and other malpractices, with what confidence can we expect social performance to be implemented on the ground? (Increasing frauds, internal lapses at MFIs: Need to strengthen supervisory arrangements to protect the poor)

    And finally, when MFIs operate using different kinds of agents in an outsourcing model, how can one be sure of the data that is provided by the MFIs with regard to social performance management? How can we rely on self - report data that is supplied by the MFIs with regard to these, especially when many MFIs may not even be aware of who their clients are because of the prevalent agent models? This question becomes even more relevant when we consider the recent experience of Sahayata Micro-Finance (Award winning Sahayata Microfinance is the latest to go astray)

    Accordingly, I raise several (further) specific questions - for the presenters and discussants in the social performance session of the Micro-Finance India summit and social performance management advocates and practitioners - with regard to the agent led decentralized model. I hope that the concerned stakeholders factor these into their discussions on social performance management at the Micro-Finance India Summit:

    When center leaders or others act as agents at the last mile, how can reliable and valid information about products and processes be obtained and used in the social performance management assessment? (Proposed Microfinance Bill has to look at the centre leader as a microfinance agent)

    When end user clients are (themselves) not known, as in many cases, what client level data can be obtained and used in the social performance management process? This aspect becomes exacerbated when one considers the fact that MIS in micro-finance is far from satisfactory (Establishing standards for effective management information systems for MFIs)

    When the monitoring for the last mile stops with the agent, what real assessments can be done with regard to various social performance objectives? (MFIN-NCAER study: Here’s the proof that microfinance agents are thriving in Tamil Nadu)

    When end use is unclear and end user clients are unknown, as in many agent led models, how can client impact be measured? (How and why did microfinance agents become a part of the Indian microfinance business?; Implementation safeguards against notorious agents are an imperative for the proposed microfinance bill)

    Thus, under circumstances such as the above, it would be impossible to assess aspects such as the following, so critical for social performance management: (1) Who uses and who is excluded from using the MFIs services?; (2) How do the MFI’s clients use the MFIs services?; (3) Do MFI services meet their client needs?; (4) Why do some clients leave or become inactive?; (5) Who benefits and how?; and (6) What benefits were unexpected? 

    When one considers these and other questions, the credibility of social performance management, as a sub-field of micro-finance and financial inclusion, is seriously at stake. I sincerely hope that the presenters and discussants at the Micro-Finance India Summit, who are also the so called practitioners of social performance management, address the aforementioned real ground level issues rather than merely focus on high level concepts that can at best be described  as superfluous and, perhaps, even redundant.

    Hence, while social performance sounds fantastic on paper, any talk of social performance is meaningless when one looks at the current ground realities in Indian micro-finance. While these concepts sound excellent at a conference in Delhi (like at the Micro-Finance India Summit), from visits to the hotbeds of micro-finance in Tamil Nadu and Andhra Pradesh among others, it is clear that enforcing social performance on the ground is an almost impossible task. This is especially true given the huge level of decentralized operations in current day micro-finance and the manner in which this model has evolved and the associated motivations therein. With the huge (and perhaps increasing) presence of agents (or ring leaders) and their all pervasive role, social performance is therefore more likely to be a mirage rather than reality! 

    Therefore, using so called tools of social performance or seals of excellence - merely to justify the existence of such (and especially, for-profit) MFIs that sound GREAT on paper but are rarely implemented (or visible) on the ground - certainly does not befit the status of an  industry like micro-finance that has pledged its troth to financial inclusion and inclusive growth. And it is about time that we start asking the question as to why many so called great concepts (like social performance or even principles of corporate governance etc) are not implemented on the ground rather than creating newer and newer tools that may have lesser and lesser relevance to field realities. And such questions will have to focus on the flawed business model adopted by the NBFC MFIs, the greater use of agents in a decentralized model, increased sharing of JLGs/clients and the like. Let us make no mistake about that!

    And, my humble plea here is as follows: The micro-finance industry needs to tackle issues head on and ensure that low-income people get access to a wide range of appropriately designed and delivered high quality financial services at affordable costs. And this does not have to come from MFIs and for profit MFIs alone. Retailing by banks and delivery of such financial services by community development finance institutions (like Cooperatives) should also be strongly encouraged – and this is a point that needs to be noted carefully and appreciated by various industry stakeholders. Therefore, let us stop creating tools and instruments to merely justify existence of for profit MFIs and rather focus on building a REALLY transparent client oriented micro-finance industry on the ground with pluralistic institutions, that can serve clients in an effective (doing the right things) and efficient (do things the right way) manner. That alone will help bring back glory to the beleaguered micro-finance industry in India as well as globally. I hope that the session on Social Performance at the 2011 Micro-Finance India Summit drive home these points in a convincing manner.

     

     

     

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