The award of free points in microfinance code of conduct assessments

It is meaningless that the COCA tool rewards mere existence of policy and/or management statements of policy implementation when it should be really looking at solid evidence in support of implementation of the voluntary codes of conduct on the ground

An earlier Moneylife article (Have sophisticated thermometers ever reduced the temperature?) raised the issue of how the fastest growing NBFC-MFIs received higher (better) code of conduct assessments (COCA) scores in relation to the lower growth and not-for-profit counterparts. This peculiar finding has necessitated a close analysis of the eight SIDBI-World Bank sponsored code of conduct assessments found in the public domain (

The above exercise suggests three main conclusions:

a.    There are too many ‘free’ points (liberally given) in the COCA tool (A description of the COCA tool can be found here -  
b.    There’s a great deal of subjectivity and/or inconsistency in the application of the tool
c.    There are serious findings resulting from the assessments that have implications for Indian and global micro-finance

Each of these aspects are dealt with in detail hereafter in a series of articles. In this article, we look at the aspect of ‘too many free points’ being given.

The COCA tool looks at four parameters. The first parameter is “Approval at the policy level from the board”, which is shown as A ( Here, the COCA tool looks at the intention of the microfinance institution (MFI) only and three examples given below should help to clarify the issues here:  

1.    For example, Equitas receives 4.5 out of 5 on A (Approval at the policy level from the board) for client origination and targeting (COT).

The assessment report justifies this high score as follows:

“Equitas score on Client Origination and Targeting (COT) is high on account of its strong systems to ensure identity of clients, commitments towards not involving unauthorised agents in the client origination process and its focus on avoiding clients who have taken loan from three or more MFIs.” (Page no 6,

The key point to be noted here is that as long as the Equitas board has approved this policy, the MFI will receive a high score. Whether the policy is implemented in practice does not seem to matter for assessment and this is where the tool is weak in terms of free points (as explained later)

Two aspects stand out here:

a.  A reading of the Equitas COCA report makes it clear that there is lack of comprehensive evidence with regard to ground level implementation of the above policy and that is why the assessment report itself argues that—“In M2i’s opinion, despite all sincere efforts, some of these agents may still be in existence (though their influence may now be low) as shown in caselet 1.” (page no 7)

Caselet 1, Dhanaxmi Nagar, Chennai

This case pertains to the Dhanalxmi-1, 2 and 3 centers of Arumbakkam branch in Chennai district of Tamil Nadu. Regular center meetings of this group is held at the place of a person (male) who operates a milk distribution agency apparently on behalf of some of the centers of Equitas who have got together as an informal Self-Help Group. At this place, meetings of one of the groups of L&T Microfinance also takes place and the center leader of one of Dhanalxmi-1 group is also the leader of L&T’s groups. The operator of the milk distribution agency and the center leader have been instrumental in organising some of the groups of Equitas and L&T. Although they insist that they received no monetary compensation for doing this, they may influence the behaviour of the clients in the future.

b)    It must also be noted that Tamil Nadu is one of the major operational areas for Equitas and in Tamil Nadu, MFIs themselves have admitted to the existence of agents (Please see previous Moneylife article that provides tangible evidence regarding the same- MFIN-NCAER study: Here’s the proof that microfinance agents are thriving in Tamil Nadu)

The e mail exhibits given in the above Moneylife article are somewhere in January 2011 where as the M2i CoC assessments are said to have taken place in Dec 2010. And when these e mails literally cry foul about the huge problems created by agents, how does the COCA report justify a high score on client origination and targeting (COT), merely because of the existence of a board level policy of not using agents henceforth. This is especially a concern given that agents had been used by the MFI according to the M2i report itself and as stated in the M2i report, they could still be in existence. Again, let us remember that a policy is helpful only if it is implemented—otherwise, it is of no use at all. It is no point having great intentions, what we need is solid action and COC assessments must reward action rather than mere intentions.
A second instance of ‘free points’ being given pertains to Basix, which receives the full score (4 of 4) on A (Approval at the policy level from the board) for loan appraisal.

The COCA report justifies this 4 on 4 by stating that “Samruddhi’s policy requires a careful appraisal of the repayment capacity of the borrowers.”(, page no 13). Again, this does not have to be reflected in practice, but as long as the required policies are approved by the board then the MFI will receive a high score.

Let us now step back and juxtapose this with what Sajeev Viswanath, the CEO of BASIX said in November 2010 and I quote,

“That (following sound lending practices) is where we failed,” says Mr Viswanathan. 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 Pradesh 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)

In fact, the M2i report ( makes statements that are very contradictory to what the then CEO of BASIX himself said (as given above). The M2i statements (based on its visits to BASIX from 20th to 27th of December 2010) are also internally inconsistent as shown below:

“Samruddhi receives a high composite score on account of a high focus on maintaining high standards of staff conduct and sound loan appraisal systems.” (page no 1)

“Samruddhi should have higher focus on ensuring that informal agents do not influence client origination, and a few clients do not exert undue influence on a larger number of clients.” (page no 1)

“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. (Also see caselet 2 of Dumka unit in Jharkhand)” (Page no 12)

“Caselet 2: Kamarpara village of Dumka district has four MFIs operating. BSFL entered this village in December 2009 and was the fourth MFI in the village to start operations. Saima is part of a five member JLG which has taken a loan of Rs12,000 from BSFL. She and other members of their JLG have been taking loans from another MFI for the past three years. Total monthly instalment for both the loans taken together comes to about Rs2,500. Saima has taken the loan to invest in the cloth trading business being carried out by her son and she is not directly involved in the business. Details of loans from other MFIs are not mentioned in the loan application form or the loan appraisal form.” (Page no 12)

Given the above statements, it is clear that lender names were not recorded in all cases based on the random inspection of 15 loan appraisal forms at the Kamareddy unit of Basix. The same also appears to have happened in Dumka unit of Jharkhand.
Also, I would like to quote some data from an APMAS study on effective interest rates ( done in Kamareddy and other mandals. The study shows cases of multiple borrowing by BASIX’s clients as given in Table 3 below.

Therefore, it clear that details of loans from other MFIs were not recorded in loan appraisal forms (as found at the Kamareddy unit of Basix). Without question, the lack of this data (about other MFI loans) makes it almost impossible to have a good judgement of the debt servicing capacity of the borrowers. And when this information is missing, there is no way the loan appraisal systems can be called as ‘sound’. Let us be clear on that!

2.    Let us look at the third instance of free points where Bandhan receives the full score (4 of 4) on A (Approval at the policy level from the board) for loan appraisal, whereas the observance score is somewhat low.

That is ok but despite low observance and the lack of a policy until recently (as indicated by quotes from the M2i report below), Bandhan still has a good score on the Loan appraisal—12 out of a maximum of 16.

In fact, in the report, M2i notes that:

“Given that many of the old forms are currently in use, we did not come across a cash flow analysis in 90% of the loan forms reviewed. Bandhan maintains that the system of informal appraisal has been effective in helping it maintain a sound portfolio quality. Still, it has initiated the process to standardize and formalize loan appraisal with the introduction of the new forms.

Bandhan has recently incorporated details pertaining to income, expenses, cash flows and indebtedness in the loan applications for the micro-loans. Earlier loan application forms of micro loans did not contain these details. On an average, each branch manager has to undertake about 10-15 loan appraisals every day. While the branch managers interviewed revealed that they perform informal assessment of loan supplications which includes an assessment of incomes and expenses of potential clients, the loan appraisal for the microloans has till now been not incorporated formal analysis of the cash flows of the households, as most of the loan forms being used are old ones which did not include this analysis.” (, page no 9)

Without question, these points are best considered as free points, since practice may (and perhaps does) differ from policy. I am sure that we all agree on the fact that no points should be awarded on the basis of intention alone; the key is implementation of the policy in practice.

Therefore, the starting point should not be the intention, as approved by the board of each MFI. The starting point of the COCA tool should be the COCA framework itself. The COCA framework has been distilled from different accepted self-regulation tools and MFIs should be judged on the basis of how they implement these instead of getting awards for nicely written intentions in the form of policies. As Jack Welch, talking of the new breed of strategic planners, once said, “We have these great sounding plans but somehow we put these plans in the shelf and keep doing what we have always been doing” (paraphrased from Business Week, The New Breed of Strategic Planner)

Without any doubt, the purpose of the CoC assessments is to distinguish between having mere (policy) intentions with regard to the voluntary code of conduct as opposed to real ground level implementation of the same. Therefore, it is meaningless that the COCA tool rewards mere existence of policy and/or management statements of policy implementation when it should be really looking at solid evidence in support of implementation of the voluntary codes of conduct on the ground.


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