New Developments at Sewa Finance.

The lending methodology adopted by Sewa is wholesaling loans to CBOs for on lending to their members.
This methodology as it was adopted by Sewa had some inherent weaknesses which came to light in the second year of operations.  In the first year Sewa’s clients were the best CBOs nurtured by Sewalanka Foundation. Therefore the model worked well.
In the second year in its aggressive pursuit of lending Sewa has lent to some CBOs which were later found to be of inferior quality compared to the first year CBOs. As a result Sewa’s portfolio suffered due to rising delinquencies.
The following reasons were attributed to the weaknesses of the programme.

• The CBO leaders lacked commitment and some were involved in fraudulent activities.
• Most CBOs didn’t have a savings culture.
• CBO leaders lacked knowledge of assessing their members’ repayment capacities.
• Sewa didn’t have a system to assess member’s repayment capacities. This was assumed as the sole responsibility of the CBO.
• As a result larger loans were given and these were abused by the members.
• Sewa didn’t have a proper monitoring system to ensure proper credit utilization by the members.
• There was no control over the end beneficiary as there was no loan tracking system in place.

In the early part of 2009 Sewa identified these lapses and the following corrective actions were taken to rectify the situation.

• Credit Officers and MF managers were trained to screen the CBO leaders and the beneficiaries.
• CBOs were encouraged to start savings among their members and loans were considered only to CBOs which had Savings.
• Credit Officers and Managers were trained on Credit Assessments and assessing members’ credit needs and repayment capacities are now done by Sewa’s Credit Officers.
• A new format was introduced to assess members’ repayment capacities to ensure proper credit discipline.
• These measures helped to minimize credit abuse by the members.
• Post disbursement checks were introduced to be carried out by Credit Officers to ensure proper credit utilization.
• Credit Officers now track each member loan thus preventing likely defaults.

These new steps taken by Sewa in 2009 had a clear effect on the new loans disbursed to CBOs. 
We have also started Group loans in our Kandapola branch in the month of October 2009 and upto now disbursed Rs 10.0 mn.  The project is very successful and is running with a zero PAR.  We have also introduced the group loan system to other districts as well.
Apart from introducing these new mechanisms Sewa launched an aggressive recovery campaign in the districts.
There were genuine reasons too for default such as inclement weather patterns which resulted in crop failure and other valid reasons in some occasions.
Also there were willful defaulters and fraudulent CBO leaders and members.
The first category needed some assistance by way of longer repayment periods and concessionary rates of interest to pay back the defaulted loans. Their requests were favourably accommodated by Sewa and in most instances their loans were restructured after executing legal agreements.
Regarding the second category there was no option but to institute legal proceedings against these errant CBOs to recover these loans.
The relevant districts whose loans fell within this category have signed agreements with Sewa to recover them during a period of two years. The responsibility to recover these loans is now shifted to the respective districts.
Since the loans falling under the second category do not yield any interest income to Sewa the management decided to segregate this loan portion from the portfolio and show as receivables from districts under current assets.