How COCA grading improves lending processes

Over the years, lenders and investors have been concerned about the gaps in loan appraisals. Stringent loan recovery methods, unreasonable interest rates, bypassing regulations, accepting savings from members, and a lack of a proper customer-grievance system were the concerns.  

Micro Finance Institutions (MFIs) had to be educated to adhere to a lending system that encouraged transparent client relationships and feedback mechanisms. It must be reiterated that MFIs play a crucial role in promoting financial inclusion and the economic empowerment of unprivileged micro borrowers. They bridge the financial gaps by reaching to the most rural, far-flung areas. They provide small loans to people who do not have any access to banking facilities.

Their services include:




Finally, a robust tool had been established to address the loan-appraisal concerns. COCA (Code of Conduct Assessment) is a tool to review various norms for ethical microfinance. These included RBI’s fair practices code guidelines for Non-Banking Financial Companies, Industry Code of Conduct guidelines (Sa-dhan and Microfinance Institution Network-MFIN) and Smart Campaign’s Client Protection Principles (CPP). 

These codes promote responsible lending practices and protect the interests of both MFIs and their clients.


COCA, in essence, establish ethical standards for credit officers, ensuring that they demonstrate integrity while dealing with clients. This strengthens trust between MFIs and their clients, fostering strong long-term relationships.


Tracing the history of the COCA tool, SMERA, India’s first SME rating agency, notes:


“The Code of Conduct Assessment (COCA) tool was developed as a response to the need expressed in a meeting of stakeholders in Indian microfinance led by Small Industries Development Bank of India (SIDBI) and World Bank in December 2009. The Code of Conduct dimensions were identified by reviewing the various norms for ethical finance. These included RBI’s fair practices guidelines for Non-Banking Financial Companies, industry Code of Conduct (Sa-Dhan-MFIN) and Smart Campaign’s Client Protection Principles (CPP). 


“In 2016, a need was felt to harmonise COCA to the most recent industry Code of Conduct and standardise COCA tools of different rating/assessment agencies. In the harmonised COCA tool, the dimensions were classified into three categories: highest order, higher order and building blocks.”

SMERA’s harmonised tool is based on:


Integrity & Ethical Behaviour


Client Protection



Client Education

Feedback & Grievance Redressal

Data Sharing

SMERA’s COCA assessment exercise includes:

Where COCA gradings for MFIs are concerned, SMERA follows a three-tiered approach to consolidate the reports. Each tier is based on the number of clients managed by MFIs:


  • Tier 1: Comprises large MFIs managing more than 2,50,000 lakh clients.
  • Tier 2: Comprises medium-size MFIs — those managing 50,000 to 2,50,000 clients.
  • Tier 3: Comprises small-size MFIs managing less than 50,000 clients.

The three-tier approach is essential to see if compliance with the Code of Conduct varies with the size of MFIs.

SMERA’s COCA grading scale for MFIs is based on five definitions:


Further, in the key areas of governance, SMERA’s Code of Conduct guidelines are based on having:

  • A strong governance system for MFIs by inducting professionals with an impeccable reputation as members of the board of directors or governing body.
  • Independent people who constitute at least 1/3rd of the governing board, which must be actively involved in policy formulations.
  • A board-approved debt restructuring programme for providing relief to borrowers facing repayment stress.

A transparent system ensures that:

  • MFIs disclose all terms and conditions to clients for all services offered. These disclosures must be made in sync with the Reserve Bank of India’s (RBI) fair practices code.
  • MFIs communicate with clients in a language understood by them about all products and services offered. 
  • MFIs be clear about critical information such as the rate of interest on loans and processing fees. 

Credit officers can make more informed lending decisions by adhering to COCA codes. The process leads to better portfolio quality for MFIs. This should enhance the MFI’s overall financial performance.

Following COCA principles helps mitigate credit risks. Also, by evaluating clients’ creditworthiness, MFIs can minimise the possibility of default and improve their asset quality and portfolio performance.

When Micro, Small and Medium-sized Enterprises (MSMEs) realise they have obtained loans through responsible channels (MFIs), they make informed financial decisions and manage their businesses effectively. As MFIs improve their internal systems, they offer training and support services to the micro borrowers and micro MSMEs. 

When MFIs prioritise social responsibility and environmental sustainability, they can support the micro MSMEs that align with these values. For example, MFIs may offer preferential financing options to those involved in environmentally friendly practices. Inadvertently, such a system helps the micro MSMEs become more financially literate and adopt better business practices.

To summarise, constant communication and client protection are non-negotiables in the Code of Conduct gradings. It’s evident in every detail like MFI’s specifying the timeframe in which customers should expect a decision on their application and the sanction time for loan disbursement.

Such a system was long due: one that promotes responsible lending practices and ensures that clients are not trapped in a cycle of debt. 


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