Promising New Approaches: Moving from Safety Nets to Safety Ropes?

Promising New Approaches: Moving from Safety Nets to Safety Ropes? Dhammika Gunawardena B.Com, PGD(Adm.) PGD(Fin.), MBA Project Coordinator/Microfinance Specialist Rural Finance Sector Development Programme (RFSDP) Ministry of Finance and Planning

Composition of Govt. Current Expenditure 2005 Central govt. civil sector 15% Transfer to Households 23% Interest 27% Other transfers 6% Fertiliser subsidy 2% Samurdhi 2% Pension 9% Other 10% Defence 19% Transfer to subnational govts. 10%

100 80 24 4 13 7 28 SBS 60 40 46 52 NGO CRB RDB 20 26 0 Volume of Deposits by % Loan O/S by % Source: CGAP Survey 2005

Organizational Architectural Issues of Samurdhi Banking Societies Finance and Banking of SASL Mahasangam Samurdhi Banking Societies

ROLE OF BANKING AND FINANCE DIVISION Operates under Samurdhi Authority of Sri Lanka (SALS) Introducing new Saving & Loan Products Insurance products and systems Issuing operational circulars Obtaining Abstracts form the General Ledgers to monitor Attending to Staff matters Infrastructure development work at village level

ROLE OF MAHASANGAMAYA Social and community development work Infrastructure development work at village level Act as the District head office of SBS (One M-sangamya for every 10,000 members/beneficiaries?) Supervise SBS activities Investment of surplus money for SBS s From this earn a margin of 2% Internal Audits & investigations of SBS s

THE MAIN FUNCTIONS OF SBS S Identifying Customers/projects Collection of Deposits /Savings Granting of loans Collections & Recovery of Loans Conduct Social Development Projects Providing Reports and Information

Assets & Liabilities Continue. Liailities 20,000,000,000 15,000,000,000 10,000,000,000 5,000,000,000 0 2004 Compulsary Deposits Other Deposits Other Liabilities Equity Total Liabilities Liabilities Compulsary Deposits Other Deposits Other Liabilities Equity

OPERATIONAL ISSUES - PERFORMANCE Growth statistics Period ended 30-Jun-05 31-Dec-04 31-Dec-03 (6 Months) No of DS divisions 313 313 313 No of Branches 1,036 1,036 1,033 No of Shareholders 2,213,195 2,158,239 2,052,459 No of other accounts 4,087,867 3,969,539 3,680,786 No of compulsory Sav. accts 1,954,665 1,665,501 1,009,509 No of loan accounts 543,892 467,565 410,512 No Growth in the number of Branches. Number of shareholders - Before 2003-8% p.a. - Last two years about 5% p.a.

Income and Expenditure of SBs Continue.. 2003 6% 1% 44% 49% Interest on Loans Recovery of Bad Debts. Interest on Investment Other Income 2004 4% 1% 41% 54% Interest on Loans Recovery of Bad Debts. Interest on Investment Other Income

Expenditure of SBs Conti. 0% 6% 8% 2003 86% Interest Expenses Equipment & Establishment Personnel Cost Other Over heads 2004 4% 4% 40% 52% Interest Expenses Equipment & Establishment Personnel Cost Other Over heads

GOVERNANCE ISSUES Overall Banking Operation Banking operation weak sustainability wise Most of the Banks are not Sustainable Need to make the overall institution sustainable outreach - Still limited outreach (after 10 years) Public/Govt. of the view that SB s not achieving objectives do not have good image Only operational area s are looked into (Rule driven) No new initiatives or developments of strategic nature Lack good controls and risk management systems

No Board for SB (shareholders View) No CEO role reporting to SB board Not adopted governance standards like in other banks Audit committee No conscious effort/responsibility to improve Sustainability, GOVERNANCE ISSUES Overall Banking Operations Organizational growth Shareholder value - the poor (members), and the Government

Asset & Liability Management Low utilization of funds only 33% of Resources are invested in loans Funds made available by the Govt. as Compulsory Savings are re-invested in Govt. Debt Instruments (6,606,000,000) While having excess funds Govt. Re-finance Loans (211,507,059) Risk Profile Risk Mitigation & Control (Interest Rate Risk, Credit, Moral Hazard as a Bank) Mis-match in Assets & Liabilities inefficient utilization of funds added to the cost.

KEY PERFORMANCE INDICATORS (CGAP) E.g.:Gampaha District Current 20% 50% 1.Return on Assets 4% -2% -4% 2. Operational self-sufficiency 180% 84% 68% 3. Funding Expense Ratio 16% 16% 16% 4. PAR Ratio 4% 4% 4% 5. Cost per Borrower 2,083 4,445 5,467 6. Personnel Productivity 85 64 44

RISK PROFILE OF SAMURDHI BANKS CONTROL & AUDIT? Impact on Financial position of a SBS due to change in Risk Factors Credit Risk -10 % increase in NPL will reduce the profits by 3% (?) Interest Rate Risk -05 % change in Deposit rate will reduce profits by 69% (?)

OPERATIONAL ISSUES PERFORMANCE Growth Statistics- Other Savings (Rs.M) 6 months 2005 2004 2003 2002 Member 2,792 2,854 2,396 1,997 Non Member 381 316 226 159 Group 2,059 1,851 1,544 1,272 Children 385 350 280 225 Diriyamatha 397 326 200 214 Sisuraka 25 23 Total 6,039 5,720 4,646 3867 Growth % 23% 20% 25% Shows a slowing down of Samurdhi bank s growths in Membership and Savings and deposit mobilization from members. Group savings

OPERATIONAL ISSUES PERFORMANCE Growth Statistics- Loan portfolio Loans Outstanding (Rs millions) Year ending 30-Jun-05 31-Dec-04 31-Dec-03 Cultivation 403 398 379 Self Employed 3,213 3,031 2,489 Consumption 94 65 22 Distress 11 8 3 Fisheries 10 12 9 Sagana 11 11 20 Janabubudu 1,027 161 0 Gedara 39 7 0 Swashakthi 8 0 0 Total 4,816 3,693 2,937 Non performing loans 352 326 284 % of NPL to loans outstanding 7.3 8.8 9.7 No of Loans outstanding 543,892 467,565 412,126

OPERATIONAL ISSUES PERFORMANCE Growth Statistics- Summary/conclusions Over 85% of the loans - for income generating projects. Loans for self employment amounts to almost 86% (except for in 2005 where loans under the Janapubudu scheme was granted). Only about 1% of the portfolio is granted for housing loans About 2% for consumption and distress loans The average loan size - approx Rs 8,900/-. The total value of loans granted as a percentage of savings amounts to only 25%. This reveals that the SBS generates a huge amount of Surplus funds. Majority of these funds are invested in state owned banks. No policy on how to utilize Compulsory savings

OPERATIONAL ISSUES Circulars helps maintain a fairly good control systems Contradictions in the circulars Very often managers/staff do not comply with the circulars Circulars are too exhaustive- should be amalgamated and made simpler Circulars too rigid- restricting innovations

KEY STRATEGIC ISSUES PRODUCTS & SERVICES Low utilization of funds by the members To look beyond the group concepts To develop products that would meet the needs of all poor Loan products limited to income generating and self employment projects This shuts out the needs of a large population of the poor

KEY STRATEGIC ISSUES PRODUCTS & SERVICES Need--- New Savings products New Loan products. e.g. pawning, micro leasing, direct loans, Insurance products Other services, money transfers, etc

KEY STRATEGIC ISSUES PRODUCTS & SERVICES Customers not well serviced Not being Customer oriented (too Bureaucratic style) Customers being harassed Utilization of SDO s time well Bank managers doing other unrelated functions not leaving time for client service

Samurdhi Banking Societies (SBSs) Way forward Necessity of paradigm shift, separate social transfers from microfinance Achieve Social Mission (reaching target clients) with Financial Sustainability Cost of finance: Interest + Transaction cost + Opportunity cost Mass production Vs Mass customization Organizational Architecture, Decentralization of Mgt and Community empowerment Staff training and productivity Bring right technology

Thank you very much Dhammika Gunawardena Contact No. 071-4899021 Email = dhammika1957@yahoo.com