Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Thursday, November 4, 2010

Sa-Dhan Members (Re) Adopt The Code of Conduct in Andhra Pradesh: A Positive Step but what is the Guarantee for Implementation this time around?

Ramesh S Arunachalam, 
Rural Finance Practitioner 

I came across this very interesting piece of information:

“November 2nd 2010, the Government of Andhra Pradesh and bankers declared full support to the Code of Conduct developed by Sa-Dhan for the Microfinance sector which was adopted by its members from AP. Sa-Dhan organised a one-day meeting of its member Microfinance institutions, financing banks and the representatives of the Government of AP on the ongoing crisis in Microfinance at NABARD regional office, Hyderabad. This was attended by Principal Secretary Rural Development Mr. R. Subramanyam, Mr. Mohanaiah (CGM, NABARD), SIDBI and senior officials of major banks financing the sector.

The meeting was organised with the objective of bringing together all MFIs, bankers and the state government in a bit to find a solution to current impasse in the sector and reiterate the commitment to the Code of Conduct of Sa-Dhan. It was attended by Sa-Dhan members including NBFCs as well as NGO MFIs namely  Spandana, Share, Basix, Asmitha, Saadhana, Pragathi Seva Samithi, Indur MACS and others, numbering 28 MFIs and 25 banks .

Sa-Dhan Microfinance institutions wholeheartedly adopted the Code of Conduct and declared their commitment for its vigorous implementation within a self regulatory framework. This Code of Conduct puts high emphasis on protection of poor borrowers in rural and urban areas and strengthens transparency and governance of MFI’s operations in the state. Implementation of the Code will help the MFIs in AP to comply with the provisions of the Ordinance issued by the State Government recently. The Code of Conduct of Sa-Dhan is supported by the Ministry of Finance, Government of India and RBI and received positive acknowledgement by the AP government.  Strict enforceability is ensured by an Ethics and Grievance Redressal Committee of Sa-Dhan comprising of eminent and independent personalities. Mr. Subramanyam said encouraging words towards the efforts of Sa-Dhan members in providing access to financial services to the poor. However, he emphasised the need to improve transparency as well as collection and lending practices and to comply with the Ordinance.” Sa-Dhan note being circulated by e mail

That the Sa-Dhan Code of Conduct (CoC) is being (re) endorsed by various stakeholders is a positive development. There are several issues however with regard to implementation of the Sa-Dhan Code of Conduct and these are articulated hereafter.

First, the AP micro-finance crisis of 2005/6 did result in the Sa-Dhan CoC being framed in the first place. According to the Sa-Dhan CoC document on the Sa-Dhan website, the voluntary code was to be operational as per quotation given hereafter:  “This code comes into effect from 18 January 2007 unless otherwise indicated.”

This raises the question that despite this code of conduct that was supposedly operational, how did the Kolar or present round of AP crisis occur? Indeed, it is a fact that MFIs did not practice the Sa-Dhan voluntary code (or for that matter, the MFIN Code of Conduct) in reality. Otherwise, the Kolar or present AP crisis would not have occurred at all in the first place.

Therefore, is becomes relevant to understand the following:

1.    Why did many of Sa-Dhan’s member MFIs commit to the voluntary code of conduct in letter and spirit but shied away when it came to actual implementation?
2.    What are the key lessons learnt with regard to the so-called implementation of Sa-Dhan’s voluntary code of conduct (or lack of it) over the last three years? 
3.    How does one ensure that codes of conduct are indeed adhered to and/or are enforced on the ground?
4.    What were the key challenges and impediments to implementing the Code of Conduct last time around and how are they proposed to be overcome now?
5.    Have the codes of conduct been framed in a manner that compliance can be objectively measured and assessed?

Second, as the brief Sa-Dhan report on the November 2nd workshop notes, “The workshop was attended by Sa-Dhan members including NBFCs as well as NGO MFIs namely Spandana, Share, Basix, Asmitha, Saadhana, Pragathi Seva Samithi, Indur MACS and others, numbering 28 MFIs and 25 banks”.

This is indeed a welcome development but again, it raises some practical issues. Many of Sa-Dhan’s members are also members of MFIN (another MFI network) and some of these NBFCs are said to have been represented at the 1 day workshop.

Therefore, it becomes crucial to understand the following:

1.    Would these NBFC MFIs (who have dual membership) follow Sa-Dhan’s Code of Conduct or MFIN’s Code of Conduct or both?
2.    If these NBFC MFIs are to follow both, then, are there any apparent contradictions between Sa-Dhan’s and MFIN’s codes of conduct (and their underlying philosophies) and how can these be reconciled during actual implementation?
3.    What about the RBI fair practices code and how does it relate to the above two Codes of Conduct?
4.    Would the presence of several codes become an excuse for some MFIs to not follow any code?
5. Overall, how can we assure ourselves that the proposed self-regulatory measures (Sa-Dhan and other Codes of Conduct) will INDEED work this time around?

All of these issues must be seriously looked into by Sa-Dhan and action taken accordingly! Again, not to sound like a broken record, but I sincerely hope that too many Codes on Paper will not provide an excuse for many to not follow any code at all on the ground.

Third, it seems strange that there are two mainstream associations (and several other networks) which perhaps do not seem to communicate with each other despite common goals, vision, members and operational areas.

I think it makes a lot practical sense for Sa-Dhan and MFIN to sit down and iron out any differences between their respective codes of conduct and also agree to share information as associations. It would also be important for both associations to make a statement that they are together for the ushering in a new era of ethical, legal and sustainable micro-finance ‘that is fair to every stakeholder – the MFI’s, their clients, staff, bankers, investors, various other partners, governments and larger community.’

One last point or rather a caveat is in order: Since, in my opinion, the growth story of Indian micro-finance seems to be one of multiple lending, shared clients and common JLGs, I begin to wonder whether at all it is practical to implement any of the Codes of Conduct on the ground, unless the fundamental issue of shared clients and JLGs is sorted out. Let us hope that the (false) synergies created can be unwound so that people oriented (rather than investor driven) micro-finance gets to be implemented in India soon.

Watch out for the Zaheera Bee and other Case Studies, likely to be up in the next few days and posts on several other interesting issues in Indian Micro-finance.


  1. Voluntary codes of conduct will not work. Regulators are evading their responsibilities by relying on the industry to police itself.
    See here: http://www.microfinancefocus.com/news/2010/01/10/avoiding-a-microfinance-bubble-in-india-is-self-regulation-the-answer/

  2. There is no substitute of self imposed code of conduct but it is really unfortunate to find Sadhan to follow the same in letter and spirit. This reveals the level of degradation and greed we have blindly adopted wiithout questioning even to oneself.

  3. Hi,
    my name is Thomas Mehwald, I am working in Sa-Dhan on the Code of Conduct implementation. I am very happy about interest for and discussions on the Code implementation. I'll follow this blog and will be reachable over thomas@sa-dhan.org.

    Happy diwali.