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

whether PSC are profitable or not. The following calculation gives an indication
of PSC’s profitability:
In 2000 the total staff and building expenditure for branches including PSC is
SLR 6,018 million. Taking number of staff as cost allocation key, SLR 377
million should be allocated to PSCs.
The total interest earned on pawning (branches and PSCs) was SLR 2,070
million. As stated above PSCs had a share on these loans of 33%, consequently
SLR 692 million should be allocated to PSCs. The calculated profit of PSCs was
SLR 315 million in 2000. This calculation does not include the income of savings
nor costs of refinancing or the allocation of overhead costs. However, it shows
that PSCs are highly profitable by looking at the main sources of income and
expenditure.
PB established a new strategic plan aiming at strengthening the institution.
Regarding the implementation a more decentralised approach was chosen. Branch
related targets for savings deposits and pawn broking have been established and
the branches will be given the power to decide the best way of achieving these
targets. Promotions and rewards will be linked closely to performance.
This delegation of power and accountability makes the branches and PSCs more
independent from Head Office decisions and means an appreciation of the
decentralised structure, which should be beneficial to customers and giving hope
for improved productivity on front-end level.
Relevance of PSC for the Bank and the Customers
Pawning works in Sri Lanka because people have something to pawn. For
centuries Sri Lankan society has adopted the practice of converting large portions
of its wealth into articles such as gold and jewellery. Most families will bestow
such items on their womenfolk on birthdays, attainment of puberty, marriage and
anniversaries. In times of adversity or when cash is needed the family will opt to
convert these items of wealth into cash by depositing them in exchange for a loan.
This collateral based loan limits the risk exposure for the bank.
Among the borrowers are micro and small enterprises as well as farmers.
Agricultural production is highly risky due to its exposure to natural, especially
weather conditions. Micro and small enterprises are generally exposed to
entrepreneurial risks related to various aspects of their business such as supply,
marketing, prices and technology.
With granting pawn loans these customer segments gain access to financial
services where in the past banks were reluctant to lend because of bad
experiences. The risk is widely transferred to the customer minimises the risk of a
wilful default. This is because the borrower has an interest to pay back the loan
and regain the pawn.
This represents a departure from a lax credit supervision associated with so-called
development loans, refinanced by the government. Under these schemes the
repayment was not properly enforced and consequently borrowers often did not
pay back their loans. Wrong incentives from policy makers, e.g. generous credit
guarantees, disbursement targets etc. have contributed to an erosion of recovery
discipline of bank employees and to an erosion of repayment discipline of the
borrowers.