Co-op Rural Banks (CRBs), the forgotten giant of micro finance
As at September 30, 2016, CRBs had Rs.99.7 billion as deposits with 9.5 million accounts in 2,221 branches in all districts of the island. This works out to an average of Rs.10,421 per account. The total loans outstanding as at the same date was Rs.46.7 billion reflecting an average loan of Rs.90,000. A study done by GIZ in 2007 concluded that 85 per cent of loans were micro finance or loans below Rs.50,000. This makes CRBs by far the largest provider of micro finance i.e. small loans, though some of these loans are based on savings and even collateral.
The second largest micro finance programme in the island is Samurdhi. The table below gives the comparison.
Another important player in micro financing is the Regional Development Bank network with Rs.88 billion outstanding in loans and approximately 590,000 borrowers, averaging around Rs.150,000 per loan (annual report 2015). About 70 per cent of these borrowers have taken loans below Rs.100,000.
A lot of attention is paid by the Central Bank and Finance Ministry to loans provided by finance companies and NGOs. The largest private sector providers however, such as LOLC, had only 340,399 clients in 2017, HNB Grameen 266,000 clients as at March 2016 and Commercial Credit 360,000 clients as at March 31 2015. Of the NGOs, the largest provider Berendina, had 90,000 by the end of March 2017. NGOs in total do not have more than 500,000.
Sanasa Development Bank had an average loan size of Rs.335,835 as at end of December 2015 as per annual report and hence is not considered as micro finance for the discussion in this paper, though internationally, loans of up to the equivalent of even Rs.1 million are considered as micro finance. Sarvodaya Finance too does not focus on micro finance and gives only a very small percentage of the portfolio as loans below Rs.100,000.
As seen from the above figures, Co-operative Rural Banks are a big but silent player in the micro finance market. It is the largest organization which rural people trust, to save outside of formal banks. Currently Rs.100 billion of poor people’s money is deposited in these banks.
History
Co-op banks were initiated by the People’s Bank in 1964. The first CRB was in Menikhinna in Kandy. Initially CRBs functioned as autonomous co-operatives but the re-organization of the co-operative system undertaken in 1972 saw all CRB’s classified as Multi-Purpose Co-operatives. A number of branches were opened, 74 in 1974 and as many as 102 in 1981. Today there are 2221 branches. The link with People’s Bank did not hold for long and by 1980, the People’s Bank had no management or financing role in CRBs. The biggest mistake made was the subordination of the CRB function to the consumer lending function within Multi-Purpose Co-ops.
Efficiency of CRBs
Dr. Ariyaratne Jayamaha of the Colombo University conducted a number of studies in the late 1990’s and 2010 on CRBs. The study titled “Efficiency of Small Finance Institutions in Sri Lanka using data Envelopment Analysis” done in 2010 analysed data from all 1993 CRBs then in operation and concluded that the majority of CRBs became less efficient during the study period 2005 to 2010 and that they did not use their inputs efficiently. This was as early as 2010.(https://www.researchgate.net/publication/256667239 )
Christina Modoron doing a study for GIZ in 2009 made the following conclusions on CRBs: “The main operational challenges for their microfinance business lies in the inadequacy of Management Information System (MIS) and in poor utilization of technology (65 per cent of all respondents), delayed repayments of loans (58 per cent), strong competition (55 per cent), shortage of funds (46 per cent) and lack of equipment (40 per cent). It has to be noticed that most of the challenges are interrelated: inadequate MIS, poor technology and equipment make loan quality monitoring difficult, which results in poor loan repayment performance. The shortage of funds reflects more an issue of misallocation rather than of funds mobilization.”
Recommendations
1) CRBs are regulated by the Co-operative Department which has no capacity in micro finance and banking. It is strongly recommended that CRB’s be brought under the Micro Finance regulation regime now enacted under the Micro Finance Act. This is a must if the near Rs.100 billion in savings of the rural poor is to be safeguarded.
2) CRB’s should be de-linked from MPCS’s as some of them misuse savings of CRB’s to put up buildings, etc.
3) CRB staff should be trained in monitoring of micro finance work. This should include training on how to calculate key indicators such as Portfolio at risk, Delinquency management, market research to develop products wanted by customers and proper accounting.
4) They can develop a partnership with Lanka Micro Finance Network or RDB for capacity building
5) Use of IT should be made compulsory with a definite deadline to develop systems
6) Bringing CRB’s under the proposed CRIB will assist agencies in this sector to avoid lending to bad clients and can reduce multiple lending.
