National Microfinance Study of Sri Lanka: Survey of Practices and ...

Starting in 1994, the NCRCS is aimed at providing short-term loans for farmers to
cultivate paddy and other subsidiary food crops (including pre-harvest and postharvest
handling and processing activities). The total number of loans granted
under the program increased from 23,271 in 1999 to 32,339 in 2000 representing
a 39 percent increase by number and a percent increase by volume. The total
volume of credit disbursed in 2000 was SLR 594 million (CBSL, 2001a)
This increase was mainly due to the introduction of the Farmer’s Relief Scheme,
which allowed defaulters to pay only 25% of their defaulted loan in order to make
them eligible for new loans. The average loan size was SLR 18,000 and the
interest rate applicable for on-lending under the program remained at 12 percent
per annum during 2000 in spite of increasing interest rates in other sectors of the
economy. This entailed a subsidy of 10 percentage points from the Treasury
(ibid.)
At the end of 1999, this programme cost the government SLR 68 million in
interest subsidy paid to the implementing banks, and SLR 117 million of
expenses incurred by the CBSL under the provisions of its Credit Guarantee
Scheme. During 2000, the interest rate subsidy for NCRCS loans amounted to
Rs.40.3 million on total loans of SLR 1,736 million (ibid.).
The loan repayment rate for all banks participating in the NCRCS was only 65
percent and it is likely that the subsidised nature of this program exacerbated loan
defaults. The cumulative loss incurred by the government and the CBSL under
this program up to the end of 1999 was SLR 343 million (Sharif, 2000).
The SDCP on the other hand is targeted towards promoting self-employment
through micro-enterprise development among unemployed youth. For 2000, the
total volume of loans disbursed under this program was SLR 171 million in 3,572
loans with an average size of SLR 45,000 and a cumulative repayment record of
53 percent. Preliminary findings of a survey of defaulters reveal that poor
identification of borrowers was a key reason behind low recovery rates (ibid.)
Private Commercial Banks
Foreign-owned commercial banks have only very few branches in the rural areas
of the country and have virtually no focus on microfinance. Of the private
domestic banks, Seylan Bank, Hatton National Bank and Sampath Bank 24 also
participate in the government’s NCRCS scheme referred to above to provide
subsidised loans to paddy and other. It appears that only the HNB and Seylan
Bank have shown any significant interest in microfinance outside of government
promoted and subsidised programmes.
The Hatton National Bank
The Hatton National Bank was the first private commercial bank in Sri Lanka to
offer microfinance products for self-employment and enterprise development. In
1989 a program called Gami Pubudu was initiated utilising the HNB's own funds
with small loans being granted using project feasibility and two guarantors as
24 Sampath Bank are not profiled in this part as microfinance is a very small part of their overall
activities and the bank did not provide any information on their microfinance activities. The
Commerical Bank do not practice microfinance per se and were reluctant do disclose information
on small loans. None of the foreign owned banks undertake microfinance activities.