Innovative Products and Services Chandula P.

Abeywickrema of Hatton National Bank presents innovations in rural finance design and practices: experiences of Hatton National Bank

Innovations in Rural Finance Design and Practices: Experiences of Hatton National Bank by Chandula P. Abeywickrema, Deputy General Manager, Personal Banking, Hatton National Bank

(A) Historical backdrop Sri Lankas character and location as a large and fertile off-shore island in the very centre of the Indian Ocean and at the southern extremity of the South Asian subcontinent had a profound impact on its social and economic evolution. Sri Lanka in historical times was a nodal centre of communications across the Indian Ocean, just as it is today. A significant part of the wealth of its ancient civilisation came from its role as a major trade and transshipment centre in this ocean network, which was amongst the worlds largest trading systems before the dominance of Transatlantic trade in modern times and recent developments in the Pacific Basin. Numismatic and epigraphical evidence, as well as both domestic and foreign historical records, indicate the existence through much of Sri Lankas history of a developed shipbuilding industry and other technical and support services adjacent to good natural harbours, ports, customs and transshipment facilities; a prosperous import and export trade; a monetary exchange system ; and the presence of foreign trading communities resident in its ports and urban centres. Of particular interest is the evidence of an elaborate system of customs dues and taxes levied on imports and exports and, especially, entrepot trade. For instance, a system of inner and outer customs boundaries existed at certain ports and was clearly associated with transshipment. Thus, in ancient times Sri Lanka was not only a country with a substantial agricultural base, a highly developed irrigation technology and a rich rural hinterland, but also a society with advanced commercial and monetary systems, comparable with those prevailing in the most developed nations and regions of that time. A recognition of these historical antecedents would not only provide inspiration to contemporary planning but also serve as a pointer to the realisation of hitherto untapped potential for the development of the country in regional and global contexts. During the Polonnaruwa period, associated with the growth of traffic across the Indian Ocean, Sri Lankas participation in international trade and commerce reached new heights. In the subsequent centuries, along with the gradual shift of the seat of political power to the south-west, the participation of indigenous traders in international commerce declined, and foreign trading activity passed largely into Arab hands. Thereafter, the activation of the Cape route by the Portuguese opened new opportunities for commercial development and international trade-led growth. However, it was primarily the European Colonial powers who exploited these opportunities. While the Colonial presence established itself in the coastal regions of the country, the hill country continued to maintain its traditional

Innovations in Rural Finance Design and Practices

economic system, but with an increasingly inward orientation. A dichotomy developed between the hill country and the coastal regions as the latter began to gradually absorb European commercial principles and values. An important monetary development during the Dutch period was the introduction of paper currency to the island. By the early British period, Nattukottai Chettiars from South India were providing certain types of banking services to the business community and playing an important role in the financing of trade and commerce.

The development of banking institutions in the modern sense may be said to date from the establishment of private institution by Mr Jeronis Peiris and Mr Louis Peiris in Kandy in 1828. It was called the Bank of Kandy and was established in the early days of the coffee era. The Bank of Kandy functioned only for a very short time and it ceased to operate after 1830. The Bank of Ceylon was established in Colombo in 1841 by William Thompson, a London businessman. The Bank opened for business on June 1st 1841 on account of the importance of Kandy for the coffee plantations. The Bank of Ceylon had advanced money to coffee estate proprietors on block loans. Unfortunately a sharp fall in prices between 1845 and 1847 precipitated the crisis and the Bank was affected. After the situation worsened because of a financial crisis the bank ceased its operation in 1848. (This bank had no connection with the present Bank of Ceylon established in 1939). From around the mid-nineteenth century, other exchange banks were established and developed in response to the needs of the plantation economy; some of these banks rose and fell depending partly upon the ups and downs of economic and commercial activity. In 1884, with the passage of the Paper Currency Ordinance, the Currency Board System became operative. By the early decades of the twentieth century, the country, while still basically agricultural, had clearly taken on the characteristics of a dual economy, a highly organised plantation sector co-existing with a traditional agricultural sector of relatively low productivity. As the existing banking and credit arrangements were foreign controlled and directed almost exclusively to financing export/import trade and the plantation sector, there was rising dissatisfaction in the indigenous business community. When the Donoughmore Constitution was adopted in 1931, the banking system in Sri Lanka consisted of seven foreign exchange banks two Europeanowned private banks and three branches of Indian banks. The early Donoughmore period saw an upsurge of interest in economic diversification and industrialization and in the improvement of banking services. Thus, the State Mortgage Bank was established in 1931 and the Ceylon Savings Bank in 1932. In 1934, the Ceylon Banking Commission was appointed, with Sorabji Pochkhanawala as Chairman, to inquire into and report upon the existing conditions of banking and credit in Ceylon and to consider the steps, if any, that are feasible and desirable in respect of the provision of banking and credit facilities for (a) Agriculture, (b) Industry, (c) Trade, and also to make recommendations regarding the desirability of establishing a Stateaided Bank and sound local banks.
1
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Pursuant to the recommendations made in the report of the Pochkhanawala Commission, the Bank of Ceylon was established as a state-aided indigenous bank and commenced operations in 1939. This was a significant change in the banking sphere as this bank catered to the interests of the indigenous business sector. In 1943, the Agricultural and Industrial Credit Corporation was established to widen the access to credit of both agricultural and industrial investors. Meanwhile, the Currency Board System, which had prevailed from the mid 19th century, continued to link the Ceylon Rupee at par to the Indian Rupee, which in turn was lined to the Pound Sterling. After Independence, however, the Government felt the need for a Central Bank to manage the countrys banking and monetary policies.

In 1949, a report was prepared by John Exter, an economist from the Federal Reserve System of the United States, recommending the structure, functions and responsibilities of a Central Bank for Sri Lanka as well as necessary legislation for its establishment; these recommendations were accepted by the Government. The Central Bank of Ceylon commenced operations in August 1950, and the Currency Board system ceased to operate. In 1952, amendments were introduced to the Bank of Ceylon Act, enabling that Bank to engage in development banking. In 1956, the Central Bank initiated the establishment of the Development Finance Corporation of Ceylon, the countrys first development bank. In the 1960s the structure of the banking sector underwent changes in line with changing economic policies. Emerging from proposals made by the Central Bank to reorganise and reconstitute the Co-operative Federal Bank, which had been in existence since 1949, the Peoples Bank was established in 1961, primarily with a view to channeling more financial assistance to the rural sector. The Bank of Ceylon was nationalised in the same year. Two domestic private banks ie. the Commercial Bank of Ceylon and the Hatton National Bank, were established in 1969 and 1970, respectively. During the period 1970 -77, within a framework of administrative controls and State intervention in economic activity, increased emphasis was placed on development and rural banking and extension of the branch banking network. In 1972, primarily with a view to a more extensive mobilisation of domestic resources, the National Savings Bank was established by amalgamation of the Post Office Savings Bank, the Ceylon Savings Bank and the Savings Certificate Fund. Following the liberalisation in 1977 of economic policies, which involved a relaxation of trade and exchange controls, the banking system needed to become more competitive and sophisticated. Since then, 15 foreign banks from Europe, the USA the Middle East and Pakistan have been permitted to open branch offices in Colombo. Two new local banks, viz. Sampath Bank and Seylan Bank, were established in 1987 and 1988, respectively, and expanded rapidly in subsequent years. In 1979, Foreign Currency Banking Units were introduced, primarily with a view to providing offshore banking facilities to investors in the Investment Promotion Zone. During the 1980s the Central Bank established Regional Offices in Anuradhapura, Matale and Matara. Since 1985, the Central Bank has sponsored the establishment of 12 Regional Rural Development Banks (RRDBs), with a network of 100 branches, to expand the availability of development banking services in the rural areas.

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Another development was the introduction of merchant banking in the country in 1982, with the setting up of the Merchant Bank of Sri Lanka, a subsidiary of the Bank of Ceylon. This was followed by the establishment, in 1983, of the Peoples Merchant Bank, a subsidiary of the Peoples Bank, and in 1987 of the Mercantile Merchant Bank. Meanwhile, in the short-term money market, the Central Bank had in 1981 begun trading in Treasury Bills from its portfolio, thereby introducing a secondary market for these Bills. The activities of money brokers have since expanded significantly.

Among the noteworthy legislative developments of recent years have been the passage of the Banking Act and the Finance Companies Act, both in 1988. In 1990, in order to facilitate lending operations by the financial institutions, the Debt Recovery Act was passed and the Credit Information Bureau of Sri Lanka was set up. The banking system in Sri Lanka at present comprises of 24 commercial banks, (which include 2 state banks, 7 private local banks and 15 foreign banks) 6 development banks, 5 merchant banks and a specialized savings bank.

RURAL CREDIT Informal Even though there were no banking services before 1825, money lending between persons and organizations existed in the country. There is sufficient evidence to show that the practice of lending and borrowing was fairly widespread and that interest was charged on monies lent. Today even with broad-based coverage of rural and microfinance funding throughout the country with significant levels of funding readily available to rural and microfinance practitioners at all levels from local & international NGOs up to the professional national-level financial institutions and government programmes, there appears to be substantial amount of rural finance is channeled through informal sources. The informal credit sources are as follows : 1. 2. 3. 4. Relative Land Lords Money Lenders Traders

The higher percentage of informal borrowings could be attributed to the followings : Defaults to Bank Difficulties in providing securities to Banks Distance to formal Financial Institution High institutional loan transaction cost Simple Procedure Quick disbursements Flexibility methods in repayment terms and conditions Intimate knowledge of the borrower
3
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Easy access to their sector. Formal The involvement of the banking sector in rural credit essentially began with the establishment of the Peoples Bank in 1961. Until 1964, rural credit was provided by the Peoples Bank through its branches on a limited scale. In that year, the Cooperative Rural Banks (CRBs) were established in order primarily to reach out to rural areas which were not covered by the branches of the Peoples Bank. While the CRBs widened the access to rural credit, their main contribution was to the mobilisation of rural savings. In 1967, the Government launched the New Agricultural Credit Scheme, with the Peoples Bank as the principal participant. The Bank of Ceylons effective involvement in rural lending began only in 1973 with its participation in the Comprehensive Rural Credit Scheme. About this time, the Hatton National Bank and the Commercial Bank of Ceylon too, with their limited branch network, became involved in rural lending. A salient feature observed in the rural lending of all these banks was their concentration on cultivation credits. The Central Bank supported the efforts of these banks through the provision of refinance and guarantee facilities for agricultural credit. The direct involvement of the Central Bank in the delivery of rural credit commenced with the establishment of the Regional Rural Development Banks (RRDBs) as specialised banking institutions under the RRDB Act of 1985. The RRDBs are regionally based semi-commercial banks having the broad objective of providing a wide range of banking services in both rural and urban areas and supporting regional development activities. Their approach to lending differs from that of the other commercial banks. They engage in project-oriented lending, establish close coordination with all relevant agencies and organisations, concentrate on small loans adopt a simple style of banking, minimise loan documentation, provide mobile banking and supportive services, use field officers in project inspection and loan recovery and engage in social development activities with particular attention to economically active females. Most RRDBs also use Group Lending Schemes (GLSs), under which loans are granted to individual borrowers on the basis of group responsibility. While the commercial banks continued to engage in rural lending, their market share in such lending declined in the late 1980s, in comparison with the mid 1970s. However, several Non Governmental Organisations (NGOs) began to play a fairly significant role, both by providing rural credit themselves and, perhaps more importantly, by bringing poorer groups to the banking institutions, in particular, to the RRDBs. Some conclusions regarding the potential strengths and weaknesses of institutional credit may be drawn from the historical experience of the commercial banks and other institutions that have been engaged in rural credit. Compared with the other institutions, the commercial banks strength was demonstrated by the fact that they continued to make loans, bearing the credit risk even after limitation of the Central Bank guarantee on agricultural credit in 1979. However, the Central Banks refinance facilities were continued throughout the period. The commercial banks also have expertise in the identification and evaluation of projects, although they do not seem to have used this advantage in the area of rural credit. Compared to other institutions, the commercial banks are also in a better position to advise borrowers with regard to the financial management of projects.
4
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

The involvement of NGOs as intermediaries needs to be assessed in the light of their participation in the integration of the formal and informal sectors. NGOs were more successful than others in the identification of community needs and organising the community into groups. However, due to the variety of objectives pursued by NGOs, their participation in rural credit has been limited.

HATTON NATIONAL BANK (HNB)

Historical Perspective Hatton National Bank is a public limited liability company, which was incorporated on 5th March 1970 under the Companies Ordinance (Cap. 145, Revised Legislative Enactment 1956) in Colombo, Sri Lanka, and has been issued a license under the provisions of the Banking Act No. 30 of 1988. Hatton National Bank was established in 1888 as the Hatton Bank to cater to the flourishing tea industry. Subsequently the Bank amalgamated with selected branches of National & Grindlays Bank and was renamed Hatton National Bank (HNB) in 1970. During the past through internal growth and the acquisition of the Colombo Branches of the Mercantile Bank, Emirates Bank, Banque Indosuez, and Habib Bank AG Zurich, HNB was able to become one of the most profitable private sector commercial banks in Sri Lanka. HNB is also the largest private sector commercial bank in Sri Lanka in terms of advances, deposits, total assets and branches. Currently, the Bank has a network of 142 Customer Centres, 104 Gami Pubuduwa micro finance units, 152 Student banking centres and 2 representative offices in India and Pakistan. Today the Bank has an asset base of approximately Rs 120 Bn and commands significant market share in most core areas of operations.

HNB Entry to Rural Credit The banks entry into the area of rural credit came almost immediately after its establishment. In 1973 after 3 years of its incorporation the bank selected a agri village upliftment programme named Debera-ara-wewa Project situated in the deep South of Sri Lanka in the Monaragala District which is one of the backward areas in the country.

Debera-ara-wewa Scheme This was the very first project in Sri Lanka where a group of private sector companies pooled their expertise and resources alongside the government towards
5
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

national development. Agrohope Ltd was the consortium of private companies, which inaugurated this development programme to rehabilitate peasants in the village of Debera-ara-wewa. About 190 acres cultivable lands are irrigated by Debera-arawewa minor irrigation tank. This tank was restored by Agrohope Ltd with the assistance of Irrigation Department at an estimated cost of Rs 239,000- repairing the damaged bunds, sluices, constructing necessary irrigation channels and demarcating homesteads of 60 allottees.

HNB provided financial assistance to this company for the operation of the scheme as well as for the cultivation of crops such as paddy and other subsidiary food crops since 1974 upto 1994. A Project Manager who had experience in farming was appointed at the initial stage to over look the development of the scheme. In addition, the success of its development activities was monitored by our Bandarawela Branch through a permanent Agricultural Officer (AO) attached to the bank.

Entry to Mahaweli Area (Major Irrigation Project) HNB was invited in 1979 to participate in the pilot project located in Mahaweli H System under the accelerated Mahaweli Development Programme. This Scheme is situated in the North Central Province centering Nochchiyagama town. This scheme covers an area of approximately 6000 hectares of irrigable land allocated to 6000 farmer families. All infrastructure facilities have been provided by Mahaweli Authority whilst lending activities are solely carried out by HNB for cultivation of paddy and other subsidiary food crops and also for the other agricultural needs of the settlers such as purchase of farm machinery, animal husbandry etc. Advances also are being considered for promotion of self employment activities amongst the 2nd generation of Mahaweli settlers, construction of dwelling houses, marketing of Agro produce and small scale trading ventures etc.

Assistance for Dry Zone Farmers in North Central Province and in, Vavuniya, Mannar and Trincomalee Districts in the North East Province The bank set up a branch at a remote rural town named Kebitigollawa in the Northern side of Anuradhapura District in Sept 1974 focusing the assistance to farming community living in the above areas. Bank formulated credit schemes to provide assistance in the following sectors : Cultivation of crops Deepening of wells Sinking of tube wells Construction of agro wells

To operate this scheme effectively bank financed the purchase of water pump to supplement lift irrigation to peasant cultivators living in the rain fed cultivable areas to grow paddy and subsidiary food crops in small extent. Special emphasis was made in sinking tube wells particularly in the Mannar District financed by Kebitigollawa
6
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

branch where our bank pioneered the financing before the state banks. Financial assistance amounting to Rs 1 Mn to sink about 40 tube wells was provided by the bank recovering 97% of the financed amount. With the opening of Mannar, Vavuniya and Trincomalee branches the advances granted by Kebitigollewa branch were gradually handed over to respective branches and subsequently the Kebitigollewa branch was closed down due to high operational costs and its non-profit achievement.

The bank also operated a credit scheme to assist tobacco cultivators in the entire North Central Province with the assistance of Ceylon Tobacco Company Ltd. The introduction of a mobile bank covering the entire area to facilitate farmers the timely disbursement of funds during the growing period of cultivation and recovery of loans in the harvesting season was a salient feature of this scheme.

Up-country potato and vegetable cultivation In 1977 bank was associated in a pilot project in the Nuwara Eliya District covering a scheme to help young Agriculturalists to grow potato and up-country vegetables by the Nuwara Eliya branch. This scheme was a tremendous success and subsequently extended to Badulla and Bandarawela areas. These pioneer farmers who started out their small plots of land have today become leading Agriculturalists in the region and continuing to maintain strong links with HNB.

Under the Asian Development Bank (ADB) funded Agricultural Rehabilitation Project Credit Scheme (ARPCS) the bank has extended credit assistance to affected farmers from violence, in North East province and bordering districts through Mannar, Vavuniya, Trincomalee, Anuradhapura, Nochchiyagama and Ambalantota branches. A sum of Rs 29.77 Mn has been disbursed for rehabilitation of Agricultural and other agro-based projects. In order to assist the rural sector the bank received low cost refinance funds from the Central Bank under the Comprehensive Rural Credit Scheme which was introduced in 1973. The Central Bank introduced the New Comprehensive Rural Credit Scheme (NCRCS) in 1986 further modifying the operational procedures of CRCS facilitating attractive terms such as rescheduling facility for constituents defaulted on genuine reasons (roll-over facility) and accepting loan documents for 6 successive seasons (3 yrs) to reduce the transaction cost of borrowers. Perennial Crop Development Credit Scheme The bank has been participating in the above credit line since the inception of same in May 1994. The ADB funded credit line phase I existed till 1997 and phase II of the same started in 1998. The project consists five major components of ; a) Credit b) Farm advisory, marketing and technical services c) Research
7
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

d) Seed and planting material e) Institutional strengthening The bank using our extensive branch net work and field officers specialised for agriculture sector assisted approx. 1239 rural entrepreneurs by granting Rs 524 Mn loans under the scheme. The bank has recruited Agricultural Officers (AOs) who have knowledge and expertise in regard to agricultural operations, not only to appraise the projects, careful disbursement of loan proceeds, monitor and follow up of projects financed ensuring loan recovery but also to provide guidance in developing farmers. Each AO caters/supervise 200 300 farmers and is provided with a motor cycle to facilitate traveling. Present rural lending port folio (agriculture and agri related) handled by AOs are approximately Rs 1.3 Bn covering 12,500 projects. The AOs go out to the field examining potential for lending, selection of farmer clientele before providing bank assistance. In that manner they maintain a sound credit portfolio in each branch. Whilst providing short term cultivation loans the AOs support farmers to enhance their agricultural activities by granting medium and other long term loans to overcome from other problems with regard to irrigation facilities (purchase of water pumps and other farm machinery). The AOs also responsible for inculcate savings habit amongst the farmer community. During harvesting seasons they go to the door-step of the farmers and promote the opening of savings and other deposit accounts particularly Singithi Savings intended for minors.

Other Schemes The Bank also extended continued support for development of animal husbandry at the rural level by providing assistance for dairy farming and goat rearing. Further HNB actively participated for the Dairy Development programme sponsored by the Government, which existed till late eighties. In addition to promote traditional agricultural activities in the respective branch command areas the bank has launched an innovative credit Scheme named Gami Pubuduwa Scheme which literally means village awakening aiming the establishment of a strong and practical link between the village communities and the bank, to develop a thrust programme which will give a new orientation to village upliftment and rural development to encourage participation in rural awakening and generate activities by identifying the strengths, weaknesses and resources available amongst those living in villages and offer financial assistance to them as appropriate.

Gami Pubuduwa Scheme Hatton National Bank (HNB) launched the Gami Pubuduwa Scheme in mid 1989 to extend financial and other assistance to self employment projects and other micro enterprises sector in the rural and semi-rural areas. The primary objective of this scheme is to establish a closer linkage between the Bank and the rural poor who were treated as Non Bankable. This scheme emphasizes in harnessing innate
8
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

talents and inherent skills of the rural poor, and thereby assist them to earn their living and to become self-reliant. The ultimate goal of this scheme is to alleviate the eternal poverty of the large number of rural people. With these objectives in mind, the Bank has appointed a barefoot banker known as Gami Pubudu Upadeshaka (GPU) from the Banks staff. The GPU will closely associate with the rural poor, identifying their strengths and weaknesses and make suitable financial proposals to engage them in self-employment enterprises. The GPU liaises with various rural segments and thereby become a part of the village community. He will take part in various cultural, religious and social activities in the village, so that he will become a friend, link person linking the bank and the village community and an advisor to the villager than a mere Money Lender. He also performs a role of problem solver communicator and a co-ordinator, but does not forget him as an employee of the bank. GP Scheme was formulated not only with a view of extending credit facilities but also to give a package of banking assistance. The main ingredients of the scheme constitute rural savings mobilization and social development while extending credit. Presently, there are 104 GP units of which 24 village based and 80 branch based. There are 73 Gami Pubudu Upadeshakas (Field Officers) and 28 Agri Officers affiliated to 80 branches. During the period of last 15 years, through the GP scheme approximately 50,000 projects have been financed amounting to Rs 3 Bn of which present outstanding is Rs 998 Mn covering 11,000 projects. It is noteworthy to mention that the scheme maintains a cumulative recovery rate of 95%. Through the GPUs, the bank was able to harness approximately Rs 1 Bn as deposits. GPUs are eternally involved in mobilising of savings as part of their primary functions. Through this, the GPUs focus greatly on the rural youth, women and school children. Further, the Banks mobile units too assist the GPUs in reaching the poor while creating an awareness on the GP scheme especially, and the banking products, generally. Social mobilization is one the salient facts of the GP Scheme. Through this, the GPU establishes a closer linkage with the villager directly or through an intermediary. One of the strongest factors in the impressive collection performance was, apart from the overall evaluation/monitoring of the scheme, the relationship GPU maintains with his borrowers. Through social mobilization, bank endeavours to develop the skills of the rural youth in management of small projects, marketing, quality control etc conducting entrepreneur development programs. By taking part in variety of social activities such as sports festivals, religious ceremonies, village fairs, school exhibitions etc, the GPU establishers a closer linkage and relationship with his clientele. HNBs GP Scheme has now become one of the successful microfinance programs implemented by a commercial bank. This scheme has been highly acclaimed by several local and international agencies. With a passage of time,
9
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

the bank has now modified the scheme not only to ensure that it meets with social and economic needs of the country but also to ensure the scheme continues as an economically sustainable project of the bank.

RURAL FINANCE - PORTFOLIO

2500 2309

2000 1879

1500 RS.(Mn.) PORTFOLIO 1212 1000 899 687 500

0 2000 2001 2002 YEAR 2003 2004

10

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

RURAL FINANCE BY SCHEMES

SLR.(Mn.)

11.7

11.0 563.73

998.6 10.3 16.1 19.10 136.63 13.63 324.89 219.2

CDCS-(Coconut Development Credit Scheme) SPREAP-(Suuthern Province Regional Economic Advancement Project) Development Electrification FCDP-(Fisheries Community Development Project) NCRC-(New Comprihensive Rural Credit Scheme) PCDP-(Perennial Crop Development Project) SMILE-(Small & Micro Industries Leader & Enterpreneur Promotion Project) TDP-(Tea Development Project) Uda Tharuwa - Agri-(Credit Scheme for Financing of Farm Machinery) GP-(Gami Pubuduwa Micro Finance Scheme)

11

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

RURAL FINANCE BY DISTRICT

400.0

373.8

350.0

300.0

250.0

Rs.(Mn.)

200.0

150.0

155.7 134.9 122.0

165.8 123.9 122.9 89.2 72.7 51.3 96.7

168.0

114.3 84.277.7 71.8 55.9 45.4 84.5 51.1

100.0

50.0

23.9

28.0

17.1

DISTRICT

12

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

INNOVATIONS APPLIED IN RURAL FINANCE PROGRAMMES Rural Financing Policy of the country and the bank In line with the time to time policy decisions taken by the government of Sri Lanka to empower the rural economy of the country (specially agriculture, small & medium enterprises) the financial institutions have also linked / adjusted their financial policies to meet the requirements of rural financial sector. Thus, the HNB as one of the main financing institution, which involves in rural financing sector also follows the government policy for rural sector coupled with the banks routing financial policy. In this connection the bank has relaxed some of lending practices (applying of low rate, collateral, documents procedures, equity portion, loan size etc.) to the rural financing sector to meet the government targets as well as to provide satisfactory/ sustainable service to the rural community. However, with the increasing attention to the rural development as an important element of the national development strategy and recognized the need for providing financial services at rural level as a crucial contributory factor in achieving sustainability, now the Central Bank has processed a series of discussions with the Ministry of Finance some other government & non-government bodies with the guidance of the ADB to formulate such a policy to streamline the rural financing sector of the country.

13

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Rural financial products and services

RURAL FINANCIAL PRODUCTS OF HATTON NATIONAL BANK
SCHEME 1. NCRC PURPOSE / ELIGIBLE PROJECTS Cultivation (Paddy, chillies, red/B onions, green gram, potatoes, soya bean or any other short-term crop) MAX. LOAN AMOUNT Ranging Rs 7,000 to Rs 214,000 depending on the cultivation Rs 5.0 Mn REPAYMENT PERIOD Within 240 days or 01 month after harvest whichever is earlier Within 240 days ON LENDING RATES Interest subsidy scheme 14% p.a. to 17% p.a. (If the loan settled before due date, 8% p.a.) Self initiated funds REMARKS

2.

Production of seeds and planting materials on a commercial scale and Purchase of agricultural produce by private traders, companies, farmer organizations etc under the forward sales contract system. PCDPC II Field development of perennial crops, inter-cropping, pasture / livestock development & perennial crop nursery operation, agro-processing, market development & other activities

US$ 150,000 (all proposals above US$ 100,000 to be submitted for ADB approval)

12 years including max. grace period of 06 years

2% above AWDR when AWDR falls below 10 8.5% to 10.5% Present 8.5% to 10.5% p.a.

Back by refinance funds Donar ADB Back by refinance Donar ADB Back by refinance Donar - JBIC

Max. Rs 250,000 Max. 5 yrs including a Adding 6% to the refinance NCP RDP Development of post harvesting grace period up to 2 & activities & agri- Processing, interest rate years. NCP PRDP upgrading rice milling facilities, Present 12% p.a. livestock, fish production, cultivation of high value crops, other farm & non-farm income generating activities. Max. Rs 5.6 Mn Max. 7 yrs including a AWDR + 5% 4. SPREAP Agriculture sector service, farm Min. Rs 40,000 grace period up to 2 machinery, irrigation commercial Present 10.1% p.a. years crops, agro industries, fisheries, forestry, food processing & beverage, animal husbandry, construction & construction material, transport, manufacturing Metal products, services, miscellaneous Rs 250,000Max. 8 years inclusive 10% p.a. 5. Skills Uplifting of projects of competencyof max. grace period of Development based training holders 2 years. Project Electrical & Electronics, Textile, services, Food processing & Beverages, Agro Industries, Construction & Construction materials, Metal products, light engineering & other Min. 15% p.a. Rs. 50,0008 mths for short term 6. Poverty Uplifting the economic and social Max. 20% p.a. Agri loans Alleviation conditions of rural poor 3 yrs. for non Agriculture, Livestock, Fisheries, agricultural loans Small & Cottage Industries, Trade & Services Rs 10 Mn 3 5 years including Refinance rate + 4.75% 7. ARQIDP The projects relating to Inland (Min loan Amt. maximum grace period Present 10.6% p.a. Fisheries and Aqua Culture such as Rs 100,000) of 12 months fresh water fish and prawn production, nurseries, curing plants, processing plants, ornamental fish, aquatic plants, tissue culture ornamental aqua plants, etc. and supporting business. 1. NCRC New Comprehensive Rural Credit Scheme 2. PCDPC II Second Perennial Crop Development Project 3. NCP RDP North Central province Rural Development Project 3. NCP PRDP 4. SPREAP 7. ARQIDP North Central Province Participatory Rural Development Project Southern Province Rural Economic Advancement Project

Back by refinance Donar ADB

Back by refinance Donar JBIC Back by refinance Donar ADB

Aquatic Resources & Quality Improvement Development Project

14

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

SCHEME

PURPOSE / ELIGIBLE PROJECTS Coconut plantations with intercropping, Rehabilitation / Replantation of coconut plantation with inter-cropping, Farm equipment for coconut / inter-crop farms.

MAX. LOAN AMOUNT Rs 10.0 Mn

REPAYMENT PERIOD - Cultivation/irrigation 05 yrs including 01 yr. grace - Nursery (for intercrops) 01 yr. Inclusive of 06 months grace -Purchase of Equipment Max 05 yrs inclusive 03 months grace

ON LENDING RATES Category A : * 14% Category B : * 12% p.a.

REMARKS

8. Kapruka

Back by refinance funds Donar : Government

9.

TDP :

Category A

Replanting / infilling of Tea

US$ 300,000 (All proposals above US$ 200,000 to be submitted for ADB approval)

Category B : Nursery Development Operations

Category A Max 17 yrs including a max grace period up to 07 years Category B & C Max period of 07 yrs Including max 02 yrs grace period

Category A & B Back by 2% above AWDR when AWDR falls below 10 - refinance funds 8.5% to 10.5% Present- 8.5% to 10.5% p.a. Donar ADB Category C 6% above AWDR Present 11.51%

Category C : Factory Rehabilitation & Modernisation / Relocation of Bought Leaf Tea Factories, Purchase of vehicles for Green Leaf Transportation 10. SMILE Starting up of a project, Revolving expansion/modernisation and/or relocation project of an existing business engaged in manufacturing or a service oriented industry (value of fixed assets should not exceed Rs 14.0 Mn on completion of the project) 11. SUSAHANA Any enterprise affected by Tsunami waves occurred last Dec. 26th 2004.

Rs 5.0 Mn

Max. 10 years Inclusive of max. grace period of 02 years.

Min 9.5 % p.a. Max 14% p.a.

Back by refinance Donar JBIC

Rs 100,000 (micro enterprises) Rs 5.0 Mn (for other SMEs) Not specified

Max. 7 yrs. (Including 02 years grace)

6% p.a.

Back by refinance Government funds

12. Development

Short-term/Perennial crop cultivation, Farm machinery /equipment, Self employment projects, Fisheries, Animal Husbandry and any other income generating development activity

Generally 03 years (depends on the life-span of the project, income generation etc)

14%p.a. 17% p.a.

Self initiated

13.Uda Tharuwa (Agri)

14. Gami Pubuduwa 8. Kapruka 9. TDP

10. SMILE (Revolving) 11. SUSAHANA

01-04 yrs in seasonal / Purchase of two/four wheeled tractors, monthly instalments accessories, irrigation equipment, generators, other farm machinery & agri-equipment from M/s Browns & Co. Village upliftment & rural development Max Rs 1.0 Mn Max 04 yrs by financing for self employment (Including grace period ) projects. Coconut Development Credit Scheme (Kapruka Ayojana) Tea Development Project Credit Scheme

14% p.a. 17% p.a.

Self initiated

14% p.a. 17% p.a.

Self initiated

Small & Micro Industries Leader & Entrepreneur Promotion Project (Revolving) Loan Scheme for Tsunami affected SMEs

15

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

The programmes / strategies towards the financial self-sufficiency and financial empowerment : Maintaining quality portfolio to minimise the overdue/ NPA of our rural financing portfolio (our current collection ratio is above 94%). To achieve this targets we have utilized our efficient / experience field officers network (ie. Gami Pubuduwa Upadeshaka and Agricultural Officers) for the pre and post inspections of the projects and continuous follow-ups/ monitoring of the projects. Enhance the rural credit portfolio towards the achievement of our annual profit targets. Introduce more attractive credit schemes. Reduce the paper works of the credit delivery. Applying new technology (e-system) for the rural financial sector Proper evaluations of the projects using our well experienced field officers. Canvassing more low cost deposits to the bank and minimise the outside borrowings. Participate to the credit schemes supported by donar agencies / refinance loan schemes.

The bank has been more concerned with overall profitability then with the allocation of profits among the sectors or products. Similarly branches are not concerned with differentiating product contribution to the bottom line, as long as the branch as a whole is profitable. It is expensive for banks to operate in rural areas. The distances along impede many from even considering entry into remote villages, which are often too small to make any significant impact on the banks bottom line. HNB however, recognized many years ago that although it may require a large up front investment on the part of the bank, the individuals living in the remote areas represent the future of the bank and of the country. The challenge facing the bank today is increase the profitability of the rural finance not only as a return on the investment, but also a significant contributor to the banks bottom line.

Savings product : In HNB, we also offer the main savings products (major savings deposits & minor savings deposits) in more attractive way. Types of savings products the bank introduced with our own brand names are as follows; a) b) c) d) Pathum Vimana Savings scheme Singithi Pathum minors savings scheme Saubhagya Planned savings scheme Senior Citizens Savings Scheme

Out of the banks total local savings deposits base of Rs 42 Bn, the rural finance sector has able to maintain over 01 Bn (LKR) savings deposits from the rural clients.

16

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Savings mobilization and promotion : Time to time the bank has introduced new promotional effort to create awareness and enhance the bank's deposit base such as Pathum Vimana major savings deposits for adults, Singithi Pathum Savings for minors, Planned Savings scheme, Senior citizens savings etc. by offering them attractive rates as well as various types of incentive prize draws. From these strategies the bank has able to mobilise the savings to a significant level and enhanced the banks Rupee Savings base by 5.6 Bn (LKR) during year 2004. Further the banks Savings mobilisation/ rural sector savings mobilisation is directly link with island-wide spreaded branch net work and very strong field staff net work attached to the banks innovative micro-finance programme Gami Pubuduwa scheme. In addition the bank also launched several types of indirect savings methods such as Savings linked credit schemes (Gami Pubuduwa village awakening credit schemes and Silverline Savings deposit) compulsory savings scheme for self employment credit assist clients - Saubagya Savings deposits) group savings among the borrowers who obtain group loan facilities (Poverty Alleviation Credit Programmes launched in North and East - a credit scheme funded by JBIC) and housing loans for foreign employees who are in rural and semi urban areas with a view to increase the banks foreign remittance base.

Non financial Services and Intervention, Partners in providing Services Rural credit Scheme was formulated not only with a view of extending credit facilities, but also to give a package of banking assistance. The main ingredients of the scheme constitute rural savings mobilisation and social development while extending credit. Further, strengthen the supply of short term and long term financing, build capacity of income generating activities in the rural sector, institutionalization and commercialization of rural sector at regional level, and to alleviate poverty. The Field officer establishes a very close rapport with the rural community. In the process, he becomes more than a financier, as he also provides advice and guidance on the projects the villagers are embarking on. In addition, the Field officer engages in social activities in the rural community with a view to harnessing their productive skills and talent. The delivery of credit under the rural sector loan programme is not merely restricted to the delivery of money. The branches ensure the correct end-use of funds by assisting in purchasing the necessary equipment, raw materials etc. required for the production process, as well as by assisting the farmer/villager to obtain external expert advise wherever necessary, particularly from other field officers of the Agriculture Dept, Vet Surgeons, etc.

17

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Delivery Methodology and Outreach Entire credit activities of Rural sector is directly handled by the field officer with the direct supervision of the branch manager. Identification and the appraisal of the project is not done from the branch, relying on facts and projections on paper, like in normal commercial banking, but at field level, through practical and physical process. Normal form filling procedures are reduced to a minimum and no lengthy reports/comprehensive financial statistics are called for. The field officer assesses the viability of the proposal by making direct inquiries from the applicant, followed by discreet inquiries from the community at large, regarding the applicants creditability, if necessary. Appraisal procedures are simplified and the appraisal format is completed by the field officer. To expedite disbursement, lending authorities have been delegated to the Branch Managers. Facilities in excess of the delegated authority of the Manager are sent to Regional Managers/Zonal AGMs. However, the entire Monitoring aspects/ regulatory functions are handled by the Development Banking Division, at Head Office, which is headed by a Senior Manager under the direct supervision of a Deputy General Manager. The disbursement of the loan is done in stages, as and when necessary, to suit the requirement of the projects. The Field officer continues to supervise the progress of the project, throughout the life of the project, as frequently as possible, often on a weekly basis. The emphasis is on keeping in touch constantly. If the bank feels that the project is under-financed, he makes arrangements for further financing. Similarly, if the project has problems at operational level, the bank/ Field officer advises the villager on diversifying same and even embarking on alternate projects. When the project yields results, the bank assists in marketing and by obtaining a better price for the product.

18

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Loan Delivery Methodology

Identification / Evaluation By Field Officers

Branch

Branch Level 1st Level Approval

Security documentation Loan Disbursements

Above delegation Authority

Regional Office Follow up Monitoring Above delegation Authority

Regional Level 2nd Level Approval

Corporate Management / Board

Zonal /Head Office Level 3rd level Approval

Policy decisions, overall supervisions/ monitoring and maintains of statistics done by Head Office Development Banking Division

Repayments The terms of repayments are flexible and the emphasis is given to tailoring repayment programs according to the nature of the profits./ mode of seasonal harvest. Further it is also depends on the rules and regulation of the refinance loan schemes. A reasonable grace period is always given, based on the type of the project.

There is no hard & fast repayment programme. Recoveries can be on a monthly, seasonally or even on once & for all basis. Measures are being taken to facilitate the involvement increasing agriculture productivity as follows By introducing high yielding varieties Use of improved technology, with the help of rural sector institutions who are providing advisory/ technical assistances. Expansion of forward markets for agriculture commodities and building linkages between rural sector enterprises.

19

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Service Delivery Innovations HNB is participating in group lending schemes for rural financing activities for a considerable period of time jointly with various Agencies. A loan scheme named Poverty Alleviation Credit Scheme was commenced recently with the collaboration of Japan Bank for International Corporation (JBIC) to provide credit facilities for community groups who are considered as ineligible under general lending criteria of banks. A special micro finance drive was launched in war stricken North & Eastern regions of the country where small scale enterprises are now thriving with the prevailing cease-fire situation. Three new micro finance units were established operated by newly recreated field officers from this area itself. Workshops and other direct awareness campaigns took the message to customers, inspiring them to think bigger. From existing self-employment projects, many customers were encouraged to expand into a more lucrative venture through the support of the banks SMEs . As part of this graduating process, in 1989, eight farmers visited China for a first hand view of the latest technology, while more recently, thirteen others visited research institutions, fertilizer plants and more in India. These farmers were asked to assume a leadership role in their areas as they helped Field Officers in helping new loan recipients to yield a better return on their very first investments in life. Other successful recipients now ready to graduate into the next level have been asked to encourage poverty-stricken people in their areas to take that first step towards success. The bank is constantly innovating ways to reach an unbelievable level of customer care. Imagine, for example, three-wheelers, the poor mans vehicle, turning into a mobile bank. In the near future, rural Sri Lankans may wake-up to the sound of a three-wheeler bringing banking to their door-step. The year saw exciting plans on the boards in taking rural financing to wider, more far away places where banks have not yet gone.

Risk Management As the largest private bank in Sri Lanka with over 140 Customer Centres spread across the island and offering full spectrum of financial services to its diverse clientele, HNB encounters a wide range of both financial and non-financial risks which need to be proactively managed in order to safeguard the interests of its various stakeholders.

20

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Risk Management at HNB originates from the Board of Directors who defines the Banks risk appetite. This is a dynamic process and is periodically reviewed in the light of the prevalent economic and business conditions and the needs of the stakeholders. The Board then, in consultation with the Corporate Management of the Bank, establishes policies, processes and the structures necessary to ensure that the risks are managed within the defined risk appetite while achieving the Banks overall business objectives. The risk management function is delegated to the Corporate Management of the bank who are assisted in this endeavour by the Asset Liability Committee (ALCO), the Credit Policy Committee and the Treasury Committee. The risk management function also works closely with the Banks Audit department to identify any weaknesses in the processes and control systems that could expose the bank to risk. Audit periodically updates Management with an independent opinion on the efficacy and adequacy of the controls in place. Risk management begins with the proper identification of risks that the bank exposes itself to in the pursuit of its commercial objectives. The bank has identified the following as the major risk areas that it faces.

Credit Risk Credit Risk is defined as the risk of loss due to a default by a borrower or counterparty to a transaction. As a full service commercial Bank, credit risk constitutes the single largest risk to HNB. In todays increasingly competitive environment, the bank is mindful of the need to quickly and effectively deliver its financial services while ensuring that the risks undertaken are mitigated and managed so as to provide the bank with a reliable and consistent source of earnings. The credit approval system was refined to speed up the decision making process while ensuring high quality credit assessment. Central to this were the decentralisation of the bank into Zones and Regions and the delegation of credit approval discretions to individual officers and sanctioning committees based on an assessment of their abilities and experience. The approval process itself has been streamlined through the use of technology for on-line approvals, standardised documentation and an objective, standardised and forward looking appraisal system. The Banks Credit policies which, act as both a guide to the lending officers and also defines the parameters of the credit risks acceptable to the bank are regularly updated in line with recent developments. A risk rating system and a risk based pricing model are integral parts of the policy.

21

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Credit limits are set at the individual borrower level, industry segment and product levels to ensure there is no undue concentration of risk. This is buttressed by regular reviews of individual credits and portfolios. Automated systems are in place for the proper recording of exposures and their monitoring and control. Ongoing review of individual credits with a view towards the early identification of warning signs contribute to maintaining the health of the portfolio. Exposures that exhibit signs of problems are vigorously followed up and actioned early to minimise the impact on the banks earnings. The management of problem advances is assigned to a specialised unit that is dedicated to this task. This Unit works with clients experiencing difficulties to restructure their businesses and borrowing arrangements with a view to restoring their financial health. If and when the unit decides that the business cannot be restored to commercial viability arrangements are made to seize and realise on the collateral held.

Market Risk This is the risk of loss that arises from the holding of price sensitive assets and liabilities and is caused by volatility in interest rates, exchange rates, and equity and commodity prices. As a significant facilitator of foreign trade for its wide spectrum of clients and a major player in the foreign exchange, money and Capital markets, HNB is exposed to market risks. These risks are managed by the Banks Treasury using a combination of overall, intra-day, overnight and loss limits on its trading portfolio positions. These limits are set by the Board of Directors. For day to day monitoring and control of market risks, the Bank has an independent market risk management function (Mid-Office), with clear independence and authority, to ensure that the following responsibilities are carried out: - the development of risk limit policies (in consultation with ALCO and the Treasury Committee) and the monitoring of transactions and positions for adherence to these Policies - the design of revenue reports quantifying the contribution of various risk components, and of market risk measures - the review and approval of pricing models and valuation systems used by front and back-office personnel, and the development of reconciliation procedures.

Legal Risk and Compliance Risk Legal and compliance risks arise from the possibility of legal or regulatory changes, which may affect the Banks position, the indirect impact of global regulatory issues and uncertainties with regard to the enforceability of the obligations of customers and counterparties to the Bank. To manage bank-wide risks, specialist groups including the Legal Department assist the business units in the development and implementation of risk management practices, whilst industry standard agreements are used wherever applicable. An example of such an effort being the company-wide implementation of an anti-money laundering policy which was prepared having consideration to the FATF 40 recommendations.

22

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Specially the rural sector financing is mainly based on the following risks.

Crop failures Situations arising out of short supply of water, drought, excessive rain and uncontrollable pests too lead to rural indebtedness. Rescheduling of outstandings of existing loans have hitherto been the only solution for these problems. The customer at this juncture resorts to heavy outside borrowings at higher rates of interest.

Inadequate Marketing Systems Inadequate marketing arrangement for the disposal of stockists of agricultural / rural produce, who borrow from the bank to meet the operational cost.. Therefore, proper marketing mechanism to be implemented. This would enable the producer to fetch a higher price than the usual price given by the first and second meddlemen. The bank could also finance the buyers to purchase produce from the villagers if the bank is satisfied of the buyers capacity and capabilities. The bank has introduced a system of exchange to meet the requirement of the buyer and the seller. Eg. Forward sales contracts

Wilful defaulters This category of customers are in the habit of obtaining low cost funds from the bank with the intention of utilizing them for unproductive purposes and thereby defaulting repayment. This can be possible only by employing more Field Officers with a high sense of commitment towards rural development.

TECHNOLOGY IN RURAL FINANCE To illustrate what IT can do in rural banking, it is necessary to see what transformations IT has introduced in commercial banking. Not everyone today remembers how the Iocal banks functioned prior to 1980s, before the branch operations were automated mistakes and inefficiencies were common, while the customers were not only made to wait in long queues but also transferred from one counter to another to get a simple chore completed. The widespread IT usage in the Sri Lankan banking sector began only in the late nineteen eighties, with the initiatives taken by a few private banks. This IT wave brought the computer terminals out of the air- conditioned and entry-restricted computer rooms to the teller counters. The transactions were carried out online and the manual work was gradually replaced by the automated procedures. The pace of automation was low, mainly due to difficulties in user training and communication problems, but did not take long for the benefits of automation to justify the high cost involved.
23
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

The key business transformations this automation process has brought in can be summarized as follows. Efficient and speedy transactions - The efficiency of transactions was significantly increased by the computerization and enabled the banks to serve a larger number of customers within the same period, while shortening the queues in front of the counters. Accurate and updated transaction details - In contrast to the manual systems where the updates were slow and often inaccurate, the computer systems enabled quick updates while maintaining the accuracy of the information. Elongated banking hours - With manual systems, the banking hours were limited as more time was needed to carry out the back-office accounting functions. With the introduction of computer systems the banks could offer longer working hours for their customers. Anytime banking - The concept of anytime banking was first introduced in Sri Lanka with the installation of Automated Teller Machines (ATMs) as a part of branch automation programs. Anywhere banking - Before automation, a customer could carry out a transaction only at a branch where the account was maintained. However, the computer systems effectively connected all the branches to a centralized network and enabled carrying out transactions at any branch within the network. At present, all leading commercial banks maintain such island wide branch networks. With the introduction of Anywhere Banking' the importance the branches earlier had gradually subsided. They were no more isolated operating centers, but just entry points to the same networked system. These developments were further supplemented by introducing plastic cards, telebanking, internet banking and mobile banking facilities.

Rural Banking and IT In spite of all these developments, the rural banking sector in Sri Lanka still uses IT at a bare minimum level. Compared to the speedy and efficient service received by their urban counterparts as a result of automation, the rural population does not receive anything worthwhile in comparison.

This can be due to several reasons. Firstly it is obviously the financial constrains of Rural Finance Institutes. The profit generated by the rural banks hardly justifies the relatively high cost of automation. Maintenance services are another issue. These problems will not be solved immediately, but definitely the situation will improve with time.

24

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Private Commercial Banks role in Rural Banking A positive development that has taken place recently was the attitude change of the private commercial banks on rural banking. Almost all the commercial banks in the country now recognize it as a key sector to extend their business. Entering of Private commercial Banks has provided the benefit of automated banking services to rural sector as well. Gami Pubuduwa (Village Awakening) scheme of the Hatton National Bank, which explicitly addresses the needs of the rural community, is the pioneer scheme of this nature. Many other commercial banks too have introduced various products and services that assist the rural population. They have also shown a keen interest in expanding their island wide branch networks. Hatton National Bank is now in the process of introducing an online evaluation & approval system and loan recovery and follow up system to further improve the personalized service offered by the specialized field officers. Main features of this system include. Information gathered during field inspection & informal dialogs with prospective borrowers are input to the system. Approval procedure is done online via banks existing network and no paperwork is involved. This process expected to considerably increase the delivery time and facilitate efficient monitoring rural credit portfolio. Beside these new procedures all clients of Hatton National Bank, irrespective of rural or urban, will continue to enjoy the benefit of modern banking technology.

MANAGEMENT & GOVERNANCE At HNB, we have a strong and continuing commitment to the highest standards of governance. Governance is usually defined as a system by which companies are directed and controlled from within. This, in recent times, has been the subject of an ever-increasing focus and external demands made on public companies to conform to a set of rules and regulations to give businesses and governments a conscience and help spread prosperity in a world. Our own systems enable us to be socially and morally responsible for all actions we take internally and externally to touch all people directly or indirectly. The concept of effective governance extends to address not only shareholders expectations about effective employment of capital to provide returns, but broader perspectives on how companies should operate. HNB has always abided by the credo that we continue to maintain the highest standards in business ethics, sincerity, truthfulness, the keeping of promises and being transparently accountable to stakeholders. It is indeed a pleasure to be able to support our claim of adherence, through the numerous awards garnered year after year at home and abroad. HNBs rural credit scheme also continues to fulfill the above standards.

25

Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Organization Structure
CEO /General Manager

Deputy General Manager (Personal Banking)

Regional Mangers

Senior Manager (Development Banking)

Branch Managers

Field Officers

Human Resource Management The people factor at HNB is a strong contributor to organizational performance. The Bank comprising of almost 4200 people which include 117 field officer staff is the nucleus of the Banks hub of activities. The Human Resources Division is driven by one of our core beliefs in creating an inspiring work environment for our staff. The HR objectives of the Bank are as follows. To ensure excellence in customer satisfaction through staff. To attract, recruit, select and retain the best talent To utilize and continuously develop our staff with the view to achieving optimum productivity. To motivate, recognize and reward our employees To ensure credibility, integrity, honesty and high ethical standards among the workforce. To create a feeling of membership and belongingness through a participatory style of management. To promote harmonious Industrial Relations within the enterprise. To be a socially responsible citizen. The bank believes that a close link between HR practices and business strategies is important if a great measure of success is to be achieved. This important aspect is focused by assessing the emerging HR issues in the context of a dynamic business environment. A highly customer focused approach has been activated under the theme Service Excellence Our Passion.

The Bank strives to recruit, train, develop, retain the best talent and have structured the selection process to ensure quality recruitment. Ability tests pertaining to achievements, aptitude, and personality are used for selection. The process of induction of new recruits is carried out based on specially designed programs.
26
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

Placement of staff is dependent on the needs of the organization and the specific backgrounds of the recruits. Role & Responsibilities of a Field Officer The success of the Rural Finance program depends to a great extent on the field officers, whose basic function is to understand the needs of the villagers and provide them with the necessary advice to achieve their aspirations. In the process, the field officers play the role of supporter and friend to the villager, as well as that of a problem solver. Careful screening is done at the point of selecting field officers and only who have a fair amount of experience in general banking and who have expressed a very clear commitment with regard to barefoot banking are selected. Before being assigned duties are provided with training on the concept of the Rural Finance scheme, as well as on operational aspects. Field officers will have to perform different roles to achieve results. In performing these roles, he requires different skills so that he could effectively integrate and adapt to the village community. The effective performance of the roles will result in total success. The villager should develop confidence and trust the field officer and at the same time, as an employee of the bank, he should conduct himself in a manner which will help him to enhance the image of the bank. The high degree of dedication is one of the vital requirements for successful performance of this assignment. The changing role of a field officer could be summaries as follows. Link person of the bank and village Supporter and a friend Problem solver Change agent Communicator and a Coordinator Employee of the bank

CRITICAL FACTORS OF SUCCESS Banks policy on Rural finance. Commitment of Corporate Management Branch network & infrastructure available Qualified & experience field staff Continuous training of field staff Proper evaluation of projects Proper utilization of funds disbursed. Head office guidance, monitoring & follow up Accurate Management Information System Periodical review of Portfolio Close rapport with external agencies
27
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

CURRICULUM VITAE
Name Age Nationality Religion Wifes name Children Chandula Abeywickrema 49 years Sri Lankan Christian Chandrika Abeywickrema Daughter Anya 20 years Son Chanula 12 years chandula@sri.lanka.net Hatton National Bank Ltd, Sri Lanka Deputy General Manager Personal Banking Responsible for the following key divisions of the bank: Development Banking Division (micro finance & agri Banking) Consumer Banking Division (all personal related credit Facilities) Marketing Division Network Management Credit Card Division Pawning Division Prior to joining Hatton National Bank in 1990 as Senior Manager Marketing, worked at Lanka Orix Leasing Company Ltd for 6 years as Senior Marketing & Credit Executive Royal College, Colombo, Sri Lanka

E-mail Place of work Current Position

Previous experience

Primary & Secondary

Education
Academic Qualifications Bachelor of Commerce (Special), University of Kelaniya, Sri Lanka Professional Exposure Overseas Credit Analysis Training in Orix Corporation, Tokyo, Japan 1988 Marketing Management Course conducted by the Faculty of Business Administration, National University of Singapore 1994 Development of Business & Leadership Skills Ashridge University, UK 1999 Finance & Banking in South East Asia conducted by the Association for Overseas Technical Scholarships, Tokyo, Japan 2000 Other involvements Member of the Sponsorship & Promotion Committee of The Board of Control for Cricket in Sri Lanka during the year 2001/2002 Currently Member of the Executive Committee of the Japan Sri Lanka Technical & Cultural Association (JASTECA) 28
Hatton National Bank, Sri Lanka

Innovations in Rural Finance Design and Practices

29

Hatton National Bank, Sri Lanka