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 (http://www.sidbi.com/micro/codeofconduct.html)

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 - http://www.m2iconsulting.com/coca-reports.html)  
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 (http://www.sidbi.in/Micro/COCA%20Equitas.pdf). 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, http://www.sidbi.in/Micro/COCA%20Equitas.pdf).

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.
Source: http://www.sidbi.in/Micro/COCA%20Equitas.pdf

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.”( http://www.sidbi.com/micro/COCA%20Samruddhi.pdf, 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 (http://www.sidbi.com/micro/COCA%20Samruddhi.pdf) 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 (http://microfinance-in-india.blogspot.com/2010/11/analysis-of-apmas-april-2010-study-on.html) 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.” (http://www.sidbi.com/micro/Bandhan.pdf, 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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    How to ensure success of the Great Indian Microfinance credit bureau?

    For better credit reporting and the credit bureau to work, ‘the boards of MFIs’ must be able to re-orient their organizational vision to one of responsible finance—this means they will have to move away from their desire for ‘super fast’ unnatural growth to balanced natural growth and normal profits

    Okay, the preceding article summarized issues concerning the Microfinance credit bureau in India. If that is the situation, what then can perhaps make credit reporting better and also a credit bureau to really work in terms of checking multiple, over and ghost lending? In my opinion, there are several things that need to happen and I hope that the RBI, IFC, Omidyar and the microfinance industry work together in ensuring that these happen on the ground…

    First, for better credit reporting and the credit bureau to work, ‘the boards of MFIs’ must be able to re-orient their organizational vision to one of responsible finance—this means they will have to move away from their desire for ‘super fast’ unnatural growth and high profits (to gain better valuations in investment and go for an IPO, etc) to balanced natural growth and normal profits. Much of the motivation for multiple lending, ghost lending, performance misreporting (as happened at Sahayata) appears to be related to the above and unless that vision is altered, no amount of technology can perhaps prevent multiple lending. Technology was touted as the solution in 2005-06 after the Krishna crisis and you can judge for yourself what it has achieved so far…You may want to a previous Moneylife article on MIS (Establishing standards for effective management information systems for MFIs) which clearly shows that even the most basic issues with regard to an MIS still need significant attention in Indian microfinance—and even among the largest Indian MFIs (microfinance institutions).

    That said, even when the boards take the call, the MFI’s senior management must be willing and able to translate the above vision into action by bringing about changes in systems, policies, procedures, processes, staff attitudes, etc. This is very critical as otherwise, ‘intended strategies’ will remain on paper and realized strategies will be very different. It is like what Jack Welch, the famous CEO, commenting on the new breed of strategic planners in the 1980s, once said, “There is no point in developing great plans with lot of effort when you are going to do something else on the ground. Often times, organizations put these well-prepared plans in the shelf and lock them up and get around to doing what they are anyway doing”.  Again, the case of what happened at Sahayata should not be forgotten where its MD and CEO flattered to deceive by first espousing great concepts at the Microfinance India Summit 2010, only to be charged with serious misreporting within a year later (What is said at conferences is very different from what is implemented in practice)

    Therefore, once the MFI board and senior management have done what they have to do, then it may be possible to check multiple lending provided:
    a.    Internal control systems have sufficient checks/balances to do so;
    b.    Internal audits spot multiple and ghost lending exceptions, as and when they occur and recommend/ensure immediate corrective action
    c.    MIS provides accurate branch/field level data both from the perspective of the credit bureau (CB) and also in terms of portraying ground level reality, so that multiple and ghost lending can be tracked and dealt with—this is a very critical aspect
    d.    Field level frontline are not incentivized on disbursements and they are also made to believe in and work towards responsible finance—where multiple, ghost and reckless lending and use of agents is viewed as a bane rather than boon for the organisation
    e.    A related issue here is that MFIs must whole-heartedly decide to adopt greenfield client acquisition processes and do not indulge in other types of (not-so-desirable and fast tracked) client acquisition methods
    f.    Bankers exercise appropriate due diligence with regard to multiple and ghost lending, as part of their (notional) supervisory role in discharging their priority sector obligations, and
    g.    The central bank ensures appropriate supervision on the ground, with regard to its (NBFC) MFIs, as part of its on-site and off-site supervision obligations stemming from its non-bank supervision duties

    This and much more—all with a view to put clients and their situations/needs first—would have to be done to ensure stop page of multiple, ghost and over ending that led to the Indian microfinance crisis of 2010. Therefore, the idea of thinking that a credit bureau alone could eliminate multiple lending seems very naïve—like the experiences with the previous codes of conduct (which were not implemented on the ground), such a view could result in the credit bureau becoming a red herring rather than actual solution, because, it may then distract the microfinance industry and its stakeholders from the real problems (like use of agents and shares JLGs/clients) at the grass-roots…

    (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 Great India Microfinance Credit Bureau: Questions that beg an answer...

    The establishment and use of a credit bureau in an emerging market like India a very challenging task. If serious efforts are made, it could take several years from initial discussions to regular use of the credit bureau—one that produces reliable and valid credit information reports in a transparent manner and not just some reports

    It indeed very nice to see an increasing emphasis placed by many stakeholders on the use of credit bureaus (and better credit reporting) in microfinance. One such stakeholder is the International Finance Corporation (IFC), “which is holding a ‘South Asia Regional Workshop on Microfinance Credit Reporting’ in New Delhi on 14 December 2011. IFC and co-sponsors Omidyar Network launched phase one of MFI Credit Bureau project in India in June 2009 working closely with MFIN and the existing credit bureaus, as a result of which about 45 MFIs have started reporting to a credit bureau and 55 million client records have been uploaded as 2011 draws to a close.” (http://www.microfinancefocus.com/ifc-expand-microfinance-credit-bureaus-coverage-india)

    The on-going IFC workshop on credit reporting takes place at Hotel Taj Palace, New Delhi and the organizers must be congratulated for their efforts to put together a great team of speakers throughout the day—including a special panel discussion between 4 to 5.30pm, titled, “Critical Issues: Establishing, Operating and Using Credit Bureaus for MFIs” . This article raises several such critical issues and I hope that the organizers, regulators and other stakeholders focus on these critical issues/questions, even as they work towards making the Great Indian Microfinance credit bureau go fully live.
     
    First, there has been a lack of a strong and committed leadership to ensure that the credit bureau is indeed functional within the stipulated timeframe—several deadlines have gone by and we keep hearing statements that credit bureau will be fully operational soon. It has been getting ready from Dec 2009 and therefore it becomes imperative to objectively analyse why these deadlines have constantly shifted? So, that is one major issue to ponder as going forward, it will help eliminate future delays and ensure that reliable and valid data is available transparently from the Indian micro-finance credit bureau (s) at the stipulated time.

    Second, misreporting of data is always a real threat for any microfinance credit bureau and the case of Sahayata Microfinance resounds strongly in memory (Award winning Sahayata Microfinance is the latest to go astray). The key question here is what’s the guarantee that the self-report data being provided by MFIs has not been tampered with by them (as has been alleged at Sahayata Microfinance)? As the Business Standard noted in the case of Sahayata, “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.” (Business Standard, November 18, 2011)

    Third, as clear shown in exhibits given in previous Moneylife article (MFIN-NCAER study: Here’s the proof that microfinance agents are thriving in Tamil Nadu), many of the NBFC-MFIs have self-admitted to the existence of agents and the same has also been confirmed by several studies. The MFIN sponsored NCAER study admitted to the presence of agents in Andhra Pradesh (MFIN-NCAER study unearths agents’ role in microfinance, but does not find these middlemen in Chennai) and the SIDBI-World Bank sponsored COCA reports have also provided evidence with regard to presence of agents among the fast growing NBFC-MFIs (http://www.sidbi.com/micro/codeofconduct.html). When such agents are in charge and the last mile end user clients are not known, how reliable and valid (from a measurement viewpoint) is the data supplied to a credit bureau?

    And given the above aspects of misreporting and presence of agents, it would be interesting to know if the Reserve Bank of India (RBI) or International Finance Corporation (IFC) or the credit bureaus themselves vouch for the reliability and validity of the data (provided by MFIs and) going into the credit bureaus?

    Fourth, one additional point for worry is the fact that the credit bureau initiative has not had any serious regulatory support whatsoever—I cannot recall having seen one statement from the RBI affirming the validity of the on-going credit bureau efforts. I wonder what role will the RBI have in ensuring data integrity, especially given the proliferation of agents, multiple loans to shared JLGs/clients, the lack of a unique ID and several other problems that confront typical microfinance assets (loans)? The ground situation is so messy that I doubt that any meaningful data will go into the credit bureau and I hope that the RBI looks into the various issues ASAP so that it is not caught on the wrong foot later.

    Therefore, to summarise, as a practitioner who has worked for more than two decades in over 500 of India’s districts, it is my humble opinion that reliable ground level data is seriously lacking in Indian microfinance and this is certain to affect the quality of the credit reporting to credit bureaus. Therefore, this aspect requires all the attention first and unless cleaning up takes place here, the credit bureau data cannot be called as reliable, valid and suitable for making sound credit decisions. And this needs to be recognized and addressed by the stakeholders (like IFC and Omidyar) involved in these efforts.

    Specifically, there are both structural problems (decentralized agent based microfinance models using shared JLGs/clients, remote and untraceable micro-finance assets) and bad credit-granting practices such as over-lending, multiple lending, successive greening, ghost lending (Increasing frauds, internal lapses at MFIs: Need to strengthen supervisory arrangements to protect the poor) and together they cause a variety of data problems:
    •    lack of unique identifiers (people in villages especially can have the same names and initials);
    •    lack of location identifiers (e.g. village/street names and building numbering, especially in rural areas are hugely duplicated);
    •    unavailability of key credit and borrower information (e.g. especially because of the highly prevalent agency model); and
    •    poor data quality of available information (e.g. poor MIS, huge errors in data entry, data manipulation and frauds as you have been reading etc).


    If data issues are one aspect impacting the credit bureau, IT -related constraints are another. Among the IT issues observed are:
    •    the lack of a standardized core MIS system at the MFI level;
    •    weak IT infrastructure within MFIs (branches not connected to headquarters, etc.);
    •    basic IT commodities not available or not reliable (e.g. unstable power supply and/or slow or unreliable Internet connections);
    •    hardware and software provisioning issues (e.g. limited availability of hardware brands and models to ensure quick and efficient processing of very large volumes of repetitive data that characterize micro-finance); and
    •    lack of experienced service providers for infrastructure setup and maintenance. The problem is further compounded because MIS at the MFI level is not up to commonly accepted standards.


    Please see Moneylife article on MIS given earlier: (Establishing standards for effective management information systems for MFIs)

    Thus, all of the above issues indeed make the establishment and use of a credit bureau in an emerging market like India a very challenging task. If serious efforts are made, it could take several years from initial discussions to regular use of the credit bureau—one that produces reliable and valid credit information reports in a transparent manner and not just some reports.

    So, my dear friends, please tune down your expectations and I hope that the powers that be, who argue that a credit bureau will solve all problems in Indian micro-finance (like multiple lending), do look into the above and other issues of practical relevance first. I would also like the DFIs like SIDBI, commercial banks, regulators like RBI and multi-laterals like IFC to come out and vouch safe the integrity and quality of the data being supplied to the credit bureau by Indian MFIs—in terms of data integrity, internal consistency and physical compatibility with client existence and records. Without question, they must make themselves accountable and responsible for the quality and integrity of such data, given the implications for financial inclusion and inclusive growth.

    And unless, all of the above are done, let us be clear that the credit bureau will just remain another idea like the multiple Codes of Conduct, supposedly operational on paper in the Indian micro-finance industry for a long time now!

    (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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