Microfinance Operational Modal & System of CLAFNet

The Microfinance Operational Model and System of CLAFNet

Chapter 1: Introduction

CLAFNet's Vision is:

By 2020 the most effective financial inclusion player in Sri Lanka to provide quality services to the
under-served and un-served communities

Its mission is to:

Provide inclusive financial services for under-served and un-served households in order for improving
their livelihoods, housing, and productive capacity to effectively respond to poverty.

The primary objectives of CLAFNet are to:

 Effectively responding to poverty by offering financial and non-financial services

 Introduce innovative demand-driven and affordable financial products
 Enhance CLAFNet as an effective and efficient financial service provider in order to respond to
the financial requirements of under-served and un-served households by providing quality
financial services
 Enabling financial instruments to build resilience in communities
 Pilot an innovative and effective MF model to integrate war affected households in order to
develop a post conflict financial inclusion system

CLAFNet is keen to see itself as one of the key institution in the reduction of poverty in Sri Lanka and
wants to become a model MFI in the country by following internationally accepted best microfinance
practices. Thus based on the first five years learning's of CLAFNet next 3 years (the life of this business
plan) will be focused to:

 Conduct a comprehensive microfinance market research and based on the outcome, develop an
appropriate microfinance product menu to serve under-served and un-served communities
 Offer different microfinance products on livelihoods and housing
 Offer client – driven non financial services through business advisory and housing advisory,
marking linkages and follow up technical support
 4.Develop CLAFNet’s total performance by establishing required policies and systems as per the
MF best practices and standards
 Asses and identify potential community risks and vulnerabilities to develop relevant financial
service instruments
 Conduct a detailed assessment to identify supply and demand side issues of North and East and
develop client-driven financial products

CLAFNet seeks to provide its clients in underserved communities with adapted, competitive financial
services while offering affordable products. CLAFNet is committed to having a positive social and
economic impact on the lives of its clients. CLAFNet exists to empower poor rural households by
integrating them in to the economic development cycle. As a Microfinance Institution, CLAFNet intends
to increase opportunities for the poor to access financial services by providing financial services to low
income entrepreneurs. CLAFNet provides micro loans as working capital in order to support to create ,
restore, and expand profitable family owned enterprises and livelihoods through agricultural and non-
agricultural , income generation/business activities to improve households living conditions including
housing, education, health, capacity to meet" social obligations" and safety nets. CLAFNet core values

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are enhancing poor households’ self-determination, serving as an ongoing financial resource for
members, and achieving significant outreach and financial self-sufficiency.

Standard Principles of CLAFNet

 Demand-Driven Product Development: For the success of Microfinance programs, it is essential

to conduct comprehensive market research in order to understand the clients’ needs and their
capacity to use financial services. Based on these needs MFIs have to adjust products by offering
services that people need and are willing to pay for. Additionally, product design and delivery
should allow for instability and economic interruptions in order to ensure the quality of services.
 Operational Efficiency: Quality services should be provided in an effective and efficient way in
order to reduce operational costs and as a consequence thereof, costs charged on the clients.
Therefore, simplified and standardized processes for providing credit will be established.
 Strong Repayment Discipline: In order to ensure sustainable operations MFIs have to ensure a
strong repayment discipline among their clients. By giving certain incentives of having continued
access to financial services, MFIs should make it the clients’ own best interest to repay their loans
timely.
 Sound Financial Performance: Be it in non-violent environments or post-conflict contexts,
another crucial step to sustainability for MFIs must be undertaken by charging market-oriented
interest rates. Ultimately the rates charged should cover the long-term costs for providing
Microfinance services. And even though donor funds in conflict-affected areas are initially often
larger than in regular development settings, donor start-up funding should not be considered a
laissez-faire measure in order to compensate for inefficient and wasteful operations. Efficient
financial performance must be ensured from the very start of the establishment of Microfinance
service provision.
 Achieving Scale: MFI could fulfill the first four principles and yet lose money if they are working
off a small base of clients. Therefore, achieving scale is essential for reaching as many people and
simultaneously for establishing a sustainable Microfinance institution.

Product and Services of CLAFNET MFI

Micro Lending:
 six months microloans up to LKR 25,000 for productive business purposes
 Three months microloans up to LKR 25,000 for productive business purposes
 One week microloans up to LKR 10,000 for productive business purposes
 Day microloans up to LKR 5,000 for productive business purposes

Business development services:

 Training and capacity building support on entrepreneurship and small business development
 Orientation on marketing development strategies
 Upgrading skills as business opportunity emerges.
 Development support for marketing linkages
 Day to day onsite business counseling support

Financial literacy development

 Coaching and mentoring support on business planning
 Training on best investment practices
 Training on credit, savings and banking practices
 Training on simple book keeping, record keeping and measuring profits

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11. Operational Methodology of CLAFNET MFI

 Cover the whole village- Each Credit Officer is given maximum only 7 Gram Niladhari (GN)
divisions (a local village administrative body of government) to have minimum 600 clients.
Minimum average is 100 clients from each GN.
 Less in number but frequent and effective client meetings-Clients are met at a Cluster which has
30 clients maximum. They meet for 1 hour for each month. The clients have access to Credit
Officer fortnightly in the village.
 Quick loan disbursement - Loans are disbursed within 5 working 7 days of the application.
Emergency loans disbursement as and when needed through a Credit Agent in the village.
 Low interest rate as a poverty focused approach.
 Increased efficiency in the operation- Each Credit Officer should have minimum 600 clients. A
performance based bonus system will be operated for the operational office staff to maintain an
accepted level of operational efficiency.
 Structured standard methodology-The operation is standard as specified in the operational
manual. This includes client selection, credit appraisal, application process, approval process,
client handling ethics, documentation, loan disbursement process, recovery of the loan,
monitoring and follow up etc.
 Zero tolerance on delinquency- CLAFNet will maintain 0% PAR while clients’ genuine issues
are understood and responded.
 Operationally profitable- CLAFNet's operation will profitable since the completion of its first
year, however from the 2nd month of operation all the cost will be covered from the interest
income.
 Credit plus approach- CLAFNet's approach does not limited to just giving a loan and taking back
the loan, rather it will adopt a holistic development approach by providing business advisory
services, business & management training , technical assistance and follow up guidance to all the
clients.
 100% collateral free loans – CLAFNet does not take even savings as a collateral for loans as done
in many MFIs.

Operational Locations of CLAFNET MFI

A strong ethical commitment

The CLAFNet is committed to giving access to credit to those who need it the most. Geographical, social
and gender outreach plays a key role in the strategies of CLAFNET MFIs: 50% of all CLAFNET clients
would be women and a vast majority of loans are disbursed to small farmers, micro entrepreneurs and
rural populations. CLAFNET offers its clients a variety of individual and group loan products that are
adapted to their very needs.

CLAFNet is committed to protecting its clients from potentially harmful financial products and to
ensuring that they are treated fairly at all stages of the loan cycle. The CLAFNet Group thus adheres to
the Smart Campaign for Client Protection. Concrete measures have been taken and are being developed to
ensure that basic Client Protection Principles are respected. For more information on this campaign,
please visit www.smartcampaign.org.

The CLAFNET Group is a transparent organization, and is committed to communicating openly with its
clients and other stakeholders. One of CLAFNet’s key objectives is to ensure good governance in order to

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achieve high degrees of accountability and financial compliance to stakeholders. The CLAFNet Group
has follows the Microfinance Transparency campaign to promote transparent pricing in the Microfinance
industry. For more information on this campaign, please visit www.mftransparency.org.

There are some restrictions regarding what the CLAFNet’s money is used for and credit borrowed from
CLAFNet cannot be used for the purposes like:

 Payments of other loans or other debts;

 Production of tobacco and liquor;
 Forming turnover capital of trade and intermediary business;
 Organization or purchasing products for gambling or entertainment services for the population;
 Establishing trading points; and
 Purchase of property that´s not used for business.

CLAFNet in different communities seek to adapt their methodology to the specific context in which they
operate. Nonetheless, the lending policy applied by CLAFNet is consistent with a set of commercial and
ethical principles.

A variety of loan products

CLAFNet is striving to adapt their financial products to fit the specific needs and requirements of their
clients. As a result, CLAFNet products vary from one district to the other; their specific conditions are
regularly modified and updated.

Generally, CLAFNet offer at least two categories of products:

* Small credit group loan

The Small Credit Group loan (SCGL) remains very well adapted to rural areas, where access to credit is
most limited. Potential clients form groups of four to six individuals, and jointly submit a loan
application. Each member of the group is responsible for his or her own loan repayment, but members
agree to guarantee each other’s loans.

* Individual business loans

Individual Business loans (IBL) have been designed to be flexible and match the exact needs of CLAFNet
clients. Potential clients for these loans already have a good knowledge of financial products and solid
experience with their enterprise. IBL require the provision either of goods or equipment that can serve as
collateral.

CLAFNET loan cycle

CLAFNet lending methodology follows a precise cycle of 12 stages. CLAFNet Credit Officers are
available to assist applicants and clients through all the necessary steps, from the loan application to the
reimbursement.

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Microfinance products

The microcredit loan cycles are usually shorter than traditional commercial loans with terms from
typically six months to a year with payments plus interest, pay weekly. Shorter loan cycles and weekly
payments help the clients stay current and not become surprised by large payments. Clearly the
transaction-intense nature of weekly payment collections, often in rural areas, is more expensive than
running a bank branch that provides large loans to economically secure clients in a metropolitan area. As
a result, MFIs must charge interest rates that might sound high.

Product Purpose Terms Interest rate

Income Generation Income generation, asset 50 weeks loan paid 12.5% (flat) 24%
Loan (IGL) development weekly (effective)
Mid-Term Loan Same as IGL, available at 50 weeks loan paid 12.5% (flat) 24%
(MTL) middle of IGL weekly (effective)
Emergency Loan All emergencies such as health, 20 weeks loan 1% flat
(EL) funerals, hospitalization
Individual Loan (IL) Income generation, asset 1-2 years loan repaid 11% (flat) 23%
development monthly (effective)

The Income Generating Loan is used for a variety of activities that generate income for their families.
Clients submit a loan application and based on approval receive the loan after one week. Loans are paid in
50 equal, weekly installments. After completion of a loan cycle, the client can submit a loan application
for a future loan. The approach with smaller short-term loan is to avoid long-term economic problems
with bigger loans.

The Mid Term Loan is available to clients after 25 weeks of repaying their IGL loan. A client is eligible
for a MTL if the client has not taken the maximum amount of the IGL. The residual amount can be taken
as a MTL. The terms and conditions of the MTL are otherwise exactly the same as IGL.

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The Emergency Loan is available to all clients over the course of a fiscal year. The loan is interest free
and the amount and repayment terms are agreed upon by the MFI and the client on a case by case basis.
The amount is small compared to the income generating products and is only given in times of dire need
to meet expenses such as funerals, hospital admissions, prenatal care and other crisis situations.

The Individual Loan is designed for clients and non clients that have specific needs beyond the group
lending model. Loans are given to an individual outside of the group lending process. Amounts are
typically higher than that of the income generating loan and repayments are less frequent. Applicants
must complete a strict business appraisal process and have both collateral and a guarantor.

Microfinance is not panacea from all troubles; this also means that not any poor person can obtain the
loan. In particular, representatives of very poor population, lacking stable income, living by means of
chance earnings, and particularly having debts (in relation to community facilities, relatives, friends,
etc…) cannot be clients of microfinance, since in case of microcredit non-repayment they will have more
debts, becoming poorer. For such people special programs of social assistance are needed, which are able
to support main needs of people living in the poorest dwellings, lacking garments and food.

Working method of CLAFNet

When choosing a village CLAFNet conduct a comprehensive survey to brief the potential for operations
and the local conditions in a village. CLAFNet is evaluating some key factors like village population,
degree of poverty, road accessibility, political stability and safety. When a village has been selected,
CLAFNet introduces its mission, methodology and the services they are offering.

After the informational presentation interested women and men are gathered in group formations. They
have to be in the age between 18 and 59. Women and men put them self together in groups of five to
serve as guarantors for each other. A group of five persons is small enough to create group pressure
between the members, enforcing them to be loyal to each other. In case someone of the group members is
not able to repay the loan the group is big enough to help with the payments. CLAFNet does not influence
the selection of group members nor the decision regarding the income generation activity nor the loan
amount they intend to take. Group members must live close to each other and cannot be related to each
other.

If a client defaults on her loan, the entire group typically is penalized and sometimes barred altogether
from taking further loans. This peer pressure encourages clients to be very selective about their peer
group members and to repay loans in full and on time.

Then the group training begins, and the purpose is to educate the members in the procedures of the
financial products, delivery methods, calculation of interest rates, business development skills, filling
documents, business planning etc. The members are also taught in quality management, to identify an
income generation activity, how to set prices and how to market. They field staff also build a culture of
credit discipline and collective responsibility. The field staff makes sure the members qualifies for the
credit and collect data for future analysis. Within the village, a center is created collecting the groups. The
center is responsible for the payments of all groups, enabling a dual liability system. When the village
center is created the financial transactions can begin.

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The groups meet weekly in the village center where they can discuss new loan applications, loan
utilization, and community issues. The field staff of the MFIs conducts the meetings with rigid discipline
in order to sustain the credit discipline of the group. All financial transactions are conducted during the
meetings.

Branch staffs are institutes to follow recognized principles of microfinance:

 thorough examination of potential clients of the microfinance institution;

 thorough estimation of business viability and also factors which can positively or negatively
affect the results of work in specific conditions;
 thorough registration of documents and contracts related to loan issuance and microfinance
services providing;
 keep in touch with client in combination with monitoring of the terms of paying a credit, interests
payments and with the aim to find out potential and real problems;
 setting of interest rates for microfinance services compatible with market ones;
 Quick reactions to any problems which can complicate the perspectives of getting off issued
credit pay back.

Chapter 2: Credit Policy of CLAFNet

Loan policy of CLAFNet’s basically sharply focuses on following policy directives:

 Area of Operation: CLAFNet’s lending activities shall confine to and cover specific
geographical area of operations for the purpose of enrolling members, providing loans to
clients and canvassing for business.
 Clients’ Eligibility: CLAFNet’s clients belong to target group of economically active
poor households.
 Client’s eligibility and sanction of loan will be guided by assessment of character, credit
worthiness, capital, collateral, willingness and capacity to repay loan.
 CLAFNet’s will not discriminate clients on the ground of caste, color, creed or sex.
CLAFNet will encourage women clients if they meet eligibility criteria and their loan
proposals are technically feasible & financially viable.

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 CLAFNet shall not provide loans to clients who have over dues with Government/Semi-
Government or any Financial Institutions.
 CLAFNet shall not provide loans for refinancing or redemption of existing debts; for
purchasing consumer goods
 Eligible Projects: CLAFNet will provide loan for such projects under agriculture, animal
husbandry & small business enterprises as are technically feasible and financially viable.
 CLAFNet will grant such loans as are quality and productive which means loans obtained
by clients must enhance production, productivity and profitability of enterprise and that
loans are to be repaid along with interest on time.
 Purposes of loans, size of loans, exposure limits to each client, interest rate, maturity
period of loans, repayment terms and other conditions relating to loans proposed to be
advanced to clients will be decided by Board of Directors.
 Loan Maturity Period: CLAFNet will extend short Term Loan i.e. working capital loan
for a maturity period not exceeding two weeks for micro business /enterprises.
 Business Operations: CLAFNet’s business operations need to be financially sustainable
i.e. all expenses including cost of funds, provision for loan losses, operational &
administrative cost, imminent risks etc shall have to be met from CLAFNet’s income
derived principally from interest charged to clients on loans provided to them, fees
collected for providing services to clients.
 Interest Rate: Interest Rate structure on loans will be market driven which will cover all
expenses as referred to above. Interest Rate policy will be reviewed periodically to reflect
market forces, inflation and risk factors and therefore interest rate will be decided by the
BoD and given effect for its implementation by CLAFNet. Interest rate structure may
vary among CLAFNet as well as among clients depending upon the risk factors & need
for achieving operational & financial sustainability of the concerned CLAFNet. The
Credit Committee of the concerned CLAFNet will work out interest rate structure for
types of loans & clients, loan amount etc and recommend for its approval to Board of
Directors & giving effect for implementation.
 Fees: CLAFNet shall stipulate payment of overdue interest on all loans & interest which
are not repaid on due dates. Presently, fees @ 18 per cent per annum shall be levied on
late payment. It shall be for number of days for which amount has been paid late.
 Loan Limits: Loans up to Rs……… to one single client [including family member living
under one roof will be approved by the Credit Committee and loans above Rs. ……..
will be approved by the BoD subject to recommendation by the Credit Committee.
 Loan Diversification: CLAFNet will endeavor to their best to diversify and balance the
loan portfolio among segments like agriculture, animal husbandry & small sized
processing/business units such that income can be maximized and risk can be minimized.
 Credit Contract: Credit Contract document [a legal document enforceable in the Judicial
Court of Law in Sri Lanka] stipulating all terms & conditions of loans will need to be
executed between client and CLAFNet for availing loans prior to the date of
disbursement of loans. One copy of this document shall be provided to the client for
his/her record.
 Supervision & Inspection: CLAFNet will inspect/supervise end use of loans disbursed to
clients and in the event of its misuse CLAFNet have the right to recall the loans.
 Portfolio Management: CLAFNet shall classify their Loan Portfolio & make appropriate
provision for loan losses in accordance with the criteria as defined by microfinance best
practices.
 No member of staff, Credit Committee or Board of Directors shall consider and act on a
loan proposal emanating from himself/herself or from a family member or relative.

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 Responsibility: Lending authority carries responsibility to use the authority in a proper &
prudent manner. Any violation of policy and procedure must result in restricting or
canceling his/her authority or entailing stringent disciplinary actions.
 Secrecy of Information: All information pertaining to any client of the CLAFNet shall be
kept strictly confidential. No information of any client to shall be disclosed or passed on
to anyone including client’s relatives, except as a result of Court order.

Chapter 3: Governance and Management Structure

CLAFNet has following Management Structure to lay down policy framework, to implement its policies
and to supervise that these policies are implemented.

CLAFNET’s Management structure consists of two tiers, one of which is Board of Directors/elected body
and other one is Administration Department/executive body.

 BoD who has members elected by the General Assembly is responsible for formulating business,
management and financial policies and programs for the growth and development of CLAFNet.
 BoD is accountable to General Assembly.
 Management headed by the Chief Executive Officer (CEO) with supporting staff, viz. Chief
Financial Officer (CFO) Operations Manager (OM) etc is appointed by the BoD.
 Management is responsible to carry out the policies and program formulated by the BoD with the
objectives of managing the day to day affairs of the CLAFNet in such a way that members of the
CLAFNet feel that it is owned and managed by them and it is clients friendly.
 Management is expected to put in its best effort to make CLAFNet’s operations viable &
financially sustainable.
 Broad based functions of the General Assembly, Board of Directors, and Credit Committee &
Management in relation to CLAFNet’s Loan Policy & Procedure are indicated as under.

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General Assembly

 General Assembly (GA) is the plenipotentiary and competent body of the member owned
& managed CLAFNet to elect members of the BoD and Credit Committee.
 It has the prerogative to direct the BoD to formulate Loan Policy & Procedure and submit
for GA’s approval.
 GA is responsible to supervise the affairs of the BoD with the objective of ensuring that
CLAFNet retains its character as “members-owned & managed” and achieves operational
viability from the 1st year itself & progressively financially sustainability.
 It has the added responsibility to ensure that BoD is carrying out its functions.
 GA would require that BoD, at its Annual General Meeting, presents Annual Balance
Sheet and Annual Report for discussion and adoption.
 Presentation of Annual Balance Sheet should focus sharply the steps initiated by the BoD
to make CLAFNet lending activity operationally viable, maximizing income, minimizing
risk assets and deploying human resources optimally.
 Annual Report should critically analyze the progress achieved in respect of Lending Plan
as compared to the targets stipulated; identify factors inhibiting the flow of credit &
repayments and make recommendations to accelerate the flow of credit & repayments.
 • Present for approval current year’s Annual Business and Financial Plan covering
projections on mobilizing membership & share capital; lending activities; strategy for
reduction in Non-Performing Assets; Income & Expenses and Profit & reserves.

Board of Directors

 Formulates Loan Policy & Procedure and obtains approval of the GA.
 Formulates, on an annual basis, Business Development Plan focusing annual business growth and
strategy to accomplish the business goals.
 Formulates annual Financial Plan focusing on operational viability of the CLAFNET in the 1st
year and progressively financial sustainability in subsequent years.
 Supervises the management to ensure that it carries out its functions.
 Presents Annual Balance Sheet and Annual Report in the Annual General Meeting of the GA for
discussion and adoption.
 Presents, for approval of the GA, current year’s Annual Business and Financial Plan covering
projections on lending activities; strategy for reduction in Non-Performing Assets; Income &
Expenses and Profit & reserves.
 Appoints the CEO.
 Supervises the CEO with regard to his/her managing the affairs of the CLAFNet.
 Approves Interest Rate Structure on loans to be advanced to clients upon recommendation by the
CC.
 Approves all loans above Rs. subject to recommendation by the CC.

Credit Committee

The Credit Committee shall have following three members;

The Deputy Chairperson of the BoD, one board member and the Chief Finance Officer and the Credit
Committee shall meet as frequently as possible, but in any case at least twice a month, and shall approve
all loans up to Rs……….

The Credit Committee shall be responsible for following:

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 Interview the Credit Officer/ Branch Manager and verify the facts stated in the Loan
Application Form, Business Plan, other documents & recommendations and satisfy with
client’s willingness & capacity to repay the loan.
 Comply with all the requirements as embodied in the loan policy and procedure while
considering loan proposals of the clients.
 Work out Interest Rate Structure on loans to be advanced to clients and recommend to
BoD for approval & giving effect.
 Review all inspection reports prepared by the Credit Officer/Branch Manager and
indicate future course of action on problem loans.
 Develop loan products best suited to the emerging needs of the clients & diversify the
loan portfolio and submit to BoD for consideration and approval.
 Review the implementation of the CLAFNet’s loan policy and procedure which can
increase the flow of credit & enhance repayment of loans and make recommendations to
BoD.

Chief Executive Officer (CEO)

CEO reports to BoD and is accountable to BoD in all the matters relating to all the activities of CLAFNet
and responsible for followings particularly related to Credit activities;

 Manage overall functions of CLAFNet HR, finance, operations, program to ensure effective
credit program.
 Provide technical leadership for effective lending services.
 Implement and monitor day to day administration of the CLAFNET’s lending activities.
 Implement loan policy and procedure stipulated in the Manual, recommend revisions and strategy
for accelerating the performance and developing loan business qualitatively.
 Sign all legal documents [including Credit Contract], certificates and correspondence on behalf of
the CLAFNet.
 Proper fund management of the CLAFNet.
 Marketing of CLAFNET’s lending activities to accelerate business growth in a planned way.

Marketing of business

Marketing business for CLAFNet is very crucial for selecting good clients, securing quality loan
proposals, ensuring timely repayment of loans and ultimately increasing income and profit. In this
process, Credit Officer has a very significant role to play. In Banking terminology it is called
“Relationship Management” under which CLAFNet have to build up an enduring relationship with
existing as well as new clients. For this purpose the Credit Officer is expected to perform following tasks:

 Organize clients meetings as frequently as possible, in a cost effective manner, in the area
of operation.
 Discuss with them the role of the CLAFNet and its offer for services & products that can
benefit clients, particularly increasing their production, productivity & profitability.
 Make them fully aware of all the terms & conditions as detailed in the CLAFNet’s Loan
Policy & Procedure that can help them better understand the procedure for obtaining loan
as well as their obligations.
 During these meetings good clients as well as their credit needs/loan products should be
identified.
 Some more/additional data & information can be collected that can be useful for better
credit appraisal and understanding realistically the local situation to fit in CLAFNet’s
business policy & program.

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 Problems encountered during inspection of clients’ business activities can be discussed to

seek solution to these issues.

Chapter 4: Essential Elements of Lending Activity

As CLAFNET’s main activity is lending to its clients, following are the essential ingredients of the
lending activities.

Client’s eligibility

 He/ She should be under the poverty category defined by the CLAFNet.
 He/ She should be residing within the geographical area of operation of the CLAFNet.
 He/ She should be able to demonstrate experience of profitable an operation in the activities for
which loan is required.
 He/ She should not have any over dues with Government/Semi-Government or any financial
institutions.
 Client should be willing to provide correct and updated information to CLAFNet and understand
carefully that false information will lead to serious consequences.
 Repay the full amount of the principal loan on or before the date stipulated in the credit contract.
 Pay all accrued interest at the interest rate and on or before the date noted in the credit contract.
 Abide by all terms and conditions stipulated in the credit contract.
 Willing to be a part of group.
 Availability for CLAFNet’s /group/center meetings, discussions, trainings /learning’s etc.

Purposes of loans

CLAFNET will provide loans to clients for following purposes;

All type of micro enterprises in trade, service, agriculture, animal husbandry, food processing,
handicrafts, technical work, technology business etc.

Under special conditions following business are encourage as well;

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Seed production, maintenance of fruit trees, purchasing farm equipment & machinery, soil and moisture
conservation and land reclamation, agri-processing & business, purchase of livestock, fattening of
livestock; raising calves, micro business activities that promote farm sector & animal husbandry
development, stocking and supplying inputs for crop production, stocking and supplying cattle
feeds/concentrates for livestock farming, providing contractual and marketing services to promote farm
sector and animal husbandry development, crop & vegetable cultivation etc.

CLAFNET will endeavor to consider providing credit for a combination of activities such as crop
/vegetable cultivation along with maintenance of livestock so as to ensure payment of interest on a
monthly basis and diversify loan portfolio to minimize financial risks.

After gaining sufficient experience and assessing the emerging credit needs of clients the scope will be
extended to other activities for providing credit.

Interest Rate

The Credit Committee shall work out Interest Rate Structure taking into consideration cost of borrowed
funds, provision for loan losses, operational & administrative expenses, servicing requirements, inflation,
risk factors, competitive interest rate structure prevailing in the market, reasonable profit etc and
recommend to the BoD for approval.

The Interest Rate Structure can be reviewed periodically by the BoD and revised to reflect the objectives
of the CLAFNet and market situation.

Fees

The CC can consider levying fees on providing better & efficient customer services, delayed payment of
interest & loans etc and recommend to BoD for approval.

Business Plan

In order to objectively & realistically appraise the loan proposal formulation of business plan by the
prospective client for the economic activity he/she desires to pursue by obtaining loan is very important.
The business plan should facilitate CLAFNet to assess following:

 Past experience to establish applicant’s ability & competence to manage the business
activity
 Past experience to withstand natural disaster & pests and disease outbreak in the area of
agriculture & animal husbandry
 Applicant’s preparedness/ ability to bear and manage financial risks while conducting the
activity
 Adoption of scientific methods of cultivation of crops/ maintenance of livestock through
use of yield-enhancing inputs & marketing of produce/ products to conclusively establish
client’s concern for earning sufficient profit of the activity.
 Applicant proper understands of maintenance of books of accounts to ensure expected
level of profitability in the microenterprise.
 Details of projected production, cost, income, gross margin, rate of return etc under the
activity to be pursued by obtaining loan
 Applicant’s knowledge & commitment for payment of interest & repayment of loans on
time

Loan commitment

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A formal commitment indicated in the loan contract is legally binding on both parties as spelt out in a
written document. CLAFNet is legally bound to provide credit as stated in the commitment document,
subject to client’s fulfilling all the terms and conditions. The commitment document should specify the
maximum loan amount, method of disbursement/borrowing, date of expiry of the commitment, terms of
repayment, interest rate, any fees and the collateral to be pledged as agreed between the two parties. All
loan commitments must be written.

Client’s responsibilities

CLAFNet’s Clients must appreciate & acknowledge that their loans are their direct and unconditional
obligation towards repayment in full with interest. They must repay these loans according to their Terms
& Conditions as agreed upon. This means that CLAFNet’s Clients are responsible to:

i) Repay the full amount of the loan principal on or before the date stipulated in their Loan Agreements;

ii) Pay all accrued interest at the interest rate and on or before the date prescribed in their Loan
Agreements; and

iii) Abide by all other Terms & Conditions stipulated in the Loan Contract.

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Chapter 5: Credit Management

Credit management is significantly important to ensure that credit to be provided to prospective clients
lubricates the growth process of microenterprises and increases the production, productivity & ultimately
profitability of client’s economic activity. In this process, credit appraisal, sanction, disbursements and
repayments are extremely important. These functions are expected to be carried out by qualified,
experienced & trained Credit Officers of the CLAFNet. Besides, as CLAFNet is owned & managed by its
stockholders the elected representatives on the Credit Committee have added responsibility to approve the
loans and ensure that loans shall be fully repaid with interest on time. Following are the critical stages of
the Credit Management.

Screening by Credit officer

Credit Officers primarily responsible to appraise all credit proposals emanating from prospective clients.
For the purpose of meaningful and critical appraisal of credit proposals following steps are necessarily
initiated.

Ensure that applicant has applied for obtaining loan in the prescribed Loan Application. Credit Officer
should carefully go through the LAF & verify that all the required information and data are furnished in
the LAF, along with copies of NIC, utility bills, spouse’s consent etc.

Business Plan & Cash Flow

In case LAF does not contain some information or copies of documents, Credit Officer should guide
him/her in the matter and request to submit at the earliest. It is advisable for Credit Officer to hold
periodical meetings of groups as an integral part of marketing strategy to identify good clients. In these
meetings Credit Officer should provide full details to prospective clients on “How to obtain loan from
CLAFNet? Effort should be made to develop small handouts/booklets on ‘How to obtain loan from
CLAFNet? And make available to prospective clients. This will facilitate better understanding among
them about the Loan Policy & Procedure and make CLAFNet’s task easy and smooth.

After obtaining LAF complete in all respects, important particulars of the LAF should be entered into the
Loan Application Disposal Register in order to keep watch on the movement of the loan proposal right
from its receipt by the CLAFNet till loan is finally repaid.

Credit Officer, then, should study all the information, data & documents attached with the LAF and verify
following aspects for preparing summary report and making recommendations on the proposal.

Credit Appraisal

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 The Microfinance Operational Model and System of CLAFNet

Credit Officer will carry out credit appraisal taking into consideration following;

1) Is the client residing within the geographical area of operation of the CLAFNet?
2) Is the client a person of integrity, industrious and committed to honor the repayment of loan with
interest? Credit Officer through direct & indirect inquiry may need determine this aspect of
character being very crucial during the market survey. Other attributes of good character are
absence of criminal record, possessing good reputation on account of his/her social work & status
etc.
3) Does the study of LAF establish that the client manages household expenses within limits and not
having any external debts/over dues that can jeopardize repayment prospects?
4) Does LAF reveal that the client has invested adequate amount from his own sources and created
sufficient fixed assets in the activity he/she likes to be supported by CLAFNet’s loan?
5) Does careful perusal of the business plan establish that the client [i] is having managerial
attributes & technical acumen on account of his/her having received training or having been a
progressive micro auntrepruner.[ii] is an experienced person demonstrating the ability to manage
the activity efficiently & easy access to adoption of knowledge that can increase production &
productivity [iii] can earn sufficient income that can take care of all operational expenses while
conducting the economic activity, pay interest on the loan, meet some eventualities, if any? [iv] is
capable of withstanding financial risk during the course of conducting the activity and existence
of adequate capital in the form of land, fixed assets livestock, equipment and net worth as could
be evident from the LAF ?and [v] loan requirement is adequate for the purpose for which it is
requested?
6) Does the study of Cash Flow reveal that the client has adequate sources to pay interest on
monthly basis and make repayment of loan on time?
7) Does the request for loan synchronize with the time of planting of crops and repayment with the
marketing of produce?
8) Does the term of loan or maturity period of loan adequate [not more or less] to reflect the time of
planting and marketing of produce?
9) Does the guarantor have adequate net-worth [assets more than liabilities] on which CLAFNet can
fall back for the repayment of loan, if client fails to repay on due dates?
10) Has the guarantor expressly understood the consequences of providing guarantee?

Credits Officer will, then, briefly summarize his/her evaluation aspects and recommend either for
sanction or rejection of the loan proposal to the Credit Committee and make proper record in the Loan
Receipt & Disposal Register.

Decision by Credit Committee

The CC‘s decision/resolution should include, purpose of loan, loan amount, date/s of disbursements, rate
of interest, term of loan, dates of payment of interest & repayment of loan, , penalty in the event of
default on payment interest & repayment of interest on the stipulated dates and other terms & conditions
specific to the purpose of loan. All terms & conditions of sanction must be communicated in writing to
clients. It may be appreciated that crop production loan does not necessarily be disbursed at one time but
can be disbursed in stages in accordance with the cash flow statement.

All decisions of the CC should properly record in the minutes- book. Minutes should be signed by the all
participating members of the CC in token of having been party to the decision.

Particulars of all sanctioned & rejected loan proposals should record in the Loan Receipt & Disposal
Register immediately. All should be informed of CC’s decision [sanction or rejection] preferably, through
written communication.

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 The Microfinance Operational Model and System of CLAFNet

Clients whose loan proposals are sanctioned should be informed to be in readiness to complete the
documentation procedure, such as pledging collateral & obtaining guarantor acceptable to CLAFNET.

Documentation &Disbursement

Chief Financial Officer will arrange for receiving approval for the required funds from Board and will
inform Branch Managers who, in turn, immediately communicate clients’ clients to visit CLAFNET on
the prescribed date & time to receive the loan.

While the Credit Officer would ensure that clients have submitted all the required documents complete in
all respects along with execution of the Credit Contract, CFO would disburse the loan to individual clients
either in cash or transferring the amount to their Bank Account, as the case may be, and make entries into
the respective Books of Accounts. If loan is disbursed in cash client shall sign a dated receipt for each
cash disbursement and it is necessary that transaction is witnessed by the Branch staff. Credit Officer will
ensure that client receives one copy of the Credit Contract for his/her information and record &
understand clearly all the terms & conditions of the disbursed loan, more importantly use and repayment
of loan, failing which CLAFNet has the right to proceed for legal action. Credit Officer can educate
clients in a group. CLAFNet can consider sticking posters on the walls on most important aspects of loans
for the knowledge of visiting clients. Branch Manager and Operations Manager would properly file the
loan papers and security documents in safe custody separately.

Loan Supervision & Monitoring

Credit Officer should prepare a cost effective supervision/inspection plan of visiting maximum clients
pursuing same activity in a geographically homogenous area. He/ She shall carry out
inspection/supervision over the end-use of credit to ensure that client uses the loan for the purpose for
which it has been sanctioned and, in any case, does not misuse the loan. He/ She should verify and satisfy
that client’s activity is progressing in accordance with the business plan and cash flow statement. He/she
should discuss with the client whether growth of the microenterprise is unsatisfactory or normal or better
as compared to others in the same geographical area. If unsatisfactory, the reasons may need to be
obtained and if possible, expert opinion of the may be sought immediately and corrective steps should be
initiated by the client as precautionary measures to mitigate possible risks.

Repayment of Loan

A client for the purpose of paying interest and repayment of loan would contact the Credit Officer who
would verify records and direct the client for payment to the Branch Office through the group. The CFO
is responsible to calculate correctly the amount of interest and loan due from the client from time to time,
collect and account for. It would be desirable if an entry is made in client’s documents, along with issuing
receipts in token of having received the payments. In case of cash payments, it is desirable that
transaction is witnessed by Credit Officer.

Loan delinquency

Credit Officers should remind clients at least one week in advance of their due date of repayments in
writing. This would help them make necessary arrangement for obtaining money for repayment of loans.
It is also desirable to hold a meeting of clients well in advance of the due date of repayment of loans and
inform them about the date and amount of loan due for repayment. If some clients have not repaid the
loans on the due date, he/she should immediately contact individual clients on the next day and put all
endeavors to collect the loans. Besides, the message of repayment must be communicated to them through
all possible communication channels such as, through their relatives, friends, neighbourers, guarantors

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 The Microfinance Operational Model and System of CLAFNet

etc. If still some clients have yet not repaid their loans cooperation of members of the community may be
sought and a plan of action should be worked out to contact defaulters personally and persuade to repay
the loan on a specified day/date failing which legal actions would be initiated.

This should be followed by a written communication. Each contact with the client should be properly
recorded in client’s loan file. This is a documentary evidence of the efforts put in by the CLAFNet to
recover dues. All verbal conversations with clients & promises given by them in the field & premise of
the CLAFNet as well as all attempts made to reach defaulters, which failed to recover loans, should be
systematically recorded. All these would prove to be useful if CLAFNet decides to proceed in the Court
of Law against the defaulters. If repayments are received during this process late fee/penal interest in
accordance with CLAFNet loan policy should be charged and collected.

Portfolio quality & Risk management

It should be the constant endeavor of the CLAFNet that the quality of its loan portfolio is maintained and
in any case not allowed to deteriorate for which following functions must be performed on an on-going
basis.

 Assessment of loan status from time to time

 Verification of loan and security documentation
 Analysis of clients’ financial status/ condition and historical performance
 Discussion with client in respect of problem loans
 Compliance with all requirements of Loan Policy & Procedure
 Compliance with applicable laws and regulations framed by the Government of
Sri Lanka.

Loan review is the responsibility of the Credit Officer and Branch Manager. They should establish proper
system to review all loan cases, particularly loan delinquent, in order to accomplish the stated objectives.
This system should include periodic analysis of the cogent causes of loan delinquency and formulate time
bound action plans to bring the Loan Account to order. For this purpose, whatever information is required
should be collected & discussion, if necessary, is held & corrective steps initiated without any delay.
These reports must be discussed in the Credit Committee meetings. The standard reporting format for
quality portfolio management is presented in Annex 6.

Reporting

The following information on loan shall be reviewed monthly at Credit Committee meetings and reported
to the BOD for decision:

 Scheduled payment of all loans over 30 days past due (by client and amount).
 Single payment or loans with principal or interest past due over 30 days (by client and
amount).
 Ratio of past due amounts and past due number of loans divided by outstanding amount
and number of loans in that category of loans with the loan portfolio.

Problem loans

CLAFNet should carefully study & analyze all loan accounts and prepare the list of such loan accounts as
can provide advance signals of some accounts likely to be sick. A list of such accounts called” Watch List
should be prepared and updated to include such accounts as and when warranted. This would reflect
health of the CLAFNet from time to time. A detailed report of such accounts should be prepared &
utilized to understand the gravity/ magnitude of potential problem loans in order to draw the required
attention of CLAFNet’s BoD and initiate corrective action at the earliest opportunity. These accounts

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 The Microfinance Operational Model and System of CLAFNet

should be reviewed in depth by the Credit Committee at least monthly and presented to the BOD for
decision.

Watch List loans will normally exhibit one or more of the following problems:

 Adverse financial trends and condition; i.e., declining profits, sales and working capital,
increasing debt-to-worth ratio, adverse balance sheet ratios, etc.
 .Managerial problems as also family problems that may adversely impact on the financial
status or cash-flow;
 .Declining growth & profitability;
 .Client’s failure to provide financial information;
 Repeated delinquency or request for renewals.

Loan portfolio classification

Each loan Account should be placed in one of the following classifications.

 Category of “Standard Loans” includes loans expected to be paid in full and on time, including
properly extended loans (but not more than one time) and overdue (past due) secured loans (up to
30 days) and accrued interest. Depending on solvency of the client, this group may include credits
given to clients having sustainable financial situation and high rating of solvency. Client has
never delayed repayments to CLAFNet. Client has a reliable guarantee for repayment of a credit.
 Category of “Non-standard Loans” – includes overdue under secured loans (up to 30 days), and
overdue secured loans (31 to 60 days) and accrued interest.
 Depending on solvency of the client, this group may include credits given to clients with good
financial situation but some aspects of his financial situation may cause some doubts about the
client’s repayment ability. In the case of Non-standard Loans, keep a reserve in amount of 5% of
the loan to cover probable losses.
 Category of “Uncollectible Loans” – includes overdue unsecured loans (up to 30 days), overdue
under secured loans (31 to 60 days) and overdue secured loans (61to 180 days) and accrued
interest. Depending on solvency of the client, this group may include credits given to clients who
by reporting date have doubtful or unreliable financial situation, large amount of debts and
questionable repayment ability. In the case of Uncollectible Loans, keep a reserve in amount of
30% of the loan to cover probable losses.
 Category of “Dangerous Loans” – includes overdue unsecured loans (31 to 60 days), overdue
secured loans (61 to 180 days) and accrued interest. Depending on solvency of the client, this
group includes credits given to clients, whose financial situation is poor. Clients lack cash flow.
They were often extended other loans. In the case of Dangerous Loans, keep a reserve in amount
of 75% of the loan to cover probable losses.
 Category of “Bad Loans” includes overdue unsecured loans (61 to 180 days) and all overdue
secured loans (more than 181 days) and accrued interest. This category includes credits given to
clients with no repayment ability, no liquidity or have made false representations concerning their
operations.

Clients are declared bankrupt. For this category keep a reserve in amount of 100 % of amount of a loan to
cover probable losses.

Portfolio at risk includes all outstanding loans with amounts past due in all these categories. In the case of
default, the entire principal outstanding is considered to be at risk, not just the amount past due amount.

Non-accrual interest

CLAFNet will not allow interest to accrue on:

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 The Microfinance Operational Model and System of CLAFNet

 Any loan for which payment in full of interest and principal is not expected.
 Any loan in which principal has been in default for a period of 90 days or more

and interest is in default more than 120 days.

Credit Officer will review the report of past due loans on a weekly basis to ensure compliance with this
policy. He/ She would recommend to the Credit Committee for its approval, the loans that should be
identified as non-accrual interest loans. At the time when a loan is identified as non-accrual interest loan
all previously accrued interest must be written off.[This, however mean that CLAFNet should put in
serious & concerted effort to recover accumulated interest].

The schedule of non-accrual loans and the amount of accrued interest written off each month should be
reported monthly to the Credit Committee and quarterly to the BOD. A current list of non-accrual loans
must be maintained for the purpose of disclosing this information to auditors. At such time as interest and
principal payments on the loan are brought current and it is evident that repayment capacity has resumed,
the loan can be restored to an accrual status.

Loan restructuring

CLAFNET should, before writing-off any loan as bad debt, consider necessity of some changes in the
terms & conditions of loan such as, loan maturity period/ term of loans, interest rate and repayment
schedule and procedures. The objective of doing this exercise is to explore the possibility of loan
recovery. For example, in some cases it could be agreed to reschedule the loan repayment for another
period or review the interest rate charged to the client. The Credit Committee can review the need for
restructuring the loan and recommend to the BOD for its consideration. The BoD may approve or decline
the restructuring of each loan on a case-by-case basis. If all these actions have not produced the desired
results, the CLAFNet would proceed for filing civil suit in the Court of Law for recovery of loans with
interest and force the client to pay his debt due to CLAFNet. In case the forced repayment of debt does
not yield expected results, the CLAFNet can initiate the bankruptcy process according to the Sri Lanka
legislation currently in force.

Charge-offs, Recovery & Reserve for Loan Losses

CLAFNET’s policy is to write off the principal amount, interest and fees when the loan is bad or non-
collectible for more than six months. The decision to write off loans, which cannot be covered through the
loan loss reserve or increasing the amount of expenses for the amount of the loss, is made by the BOD
based on the Credit Committee’s recommendation. A report, reflecting client’s problems, the measures
taken for repayment, evaluation of client’s ability to resume normal activity and reasons for the write-off
should be prepared by the Branch Manager and should be presented to the Credit Committee for review.
The credit committee’s recommendation should be presented to the BOD for its approval.

The writing-off the loan balance does not free the client from his/her obligation to repay the debt. This
action should not influence CLAFNet efforts for debt repayment.

CLAFNet may consider maintaining constant rapport & establish communication system with the clients
either directly or through their relatives for recovering all dues. In case client is not available or traceable
CLAFNet may consider through mass media communication for disclosing information on the
client/debtor, etc.

The Credit Committee’s recommendation to write-off a loan must be presented to BOD for approval. The
record of any loan written-off against the loan loss reserve should be maintained on off balance system
loan accounts during five years from the day of writing off. Writing off is carried out using the Loan Loss
Reserve if there is one or using current year account of expenses.

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 The Microfinance Operational Model and System of CLAFNet

The Credit Officer and Branch Manager responsible for follow up on the charge off loans would report in
writing to the Credit Committee and BOD, what recovery actions have been taken during the previous
quarter on charge offs made during the past two years. The report will include a listing of payments made
to an account after charge off has been made.

CLAFNet wil1 maintain a reserve for loan losses that should be adequate given the overall quality of the
loan portfolio, general economic conditions, expected future losses and the magnitude of problem and
non-accrual loans in the portfolio. Management should recommend an adequate amount for the provision,
considering loan losses that could be reasonably expected. It will accrue for these losses on a monthly
basis. The management and Credit Committee will be responsible for maintaining adequate reserve.
Management should review the level of the reserve for loan loss on a monthly basis and should
recommend changes that may be necessary for creating adequate reserve for loan loss.

The objective is to maintain a minimum of 2% to 10% of total gross loans in the reserve for loan loss
account.

Segregation of functions

With a view to maintaining a good degree of internal control following functions should remain
independent. This is expected to guard against intended or unintended misappropriation or mistakes in the
lending process.

 Client contact by Credit Officer

 Processing of loan proposal & recommendation by Credit Officer under the supervision
of Branch Manager.
 Loan approval after interview of the Credit Officer/Branch manager by Credit
Committee/CEO /BoD
 Management & control of funds by CEO.
 Accounting for loans, interest & fees by CFO.
 Supervision & inspection of loans by Credit Officer
 Monitoring of the loan portfolio by Branch manager/ Operations Manager
 Loan classification & delinquent loan management by Credit Officer/ Branch Manager/
Operations Manager
 Write-off of bad loans is recommended by CEO/CC/BoD.

Record keeping & Documentation

CLAFNet would comply with applicable rules & regulations with regard to retention/ archive of loan
records. Files are to be maintained on each client in sufficient detail to enable either internal or outside
evaluators to determine the credit worthiness of the client and the status of the account. CLAFNet will
document in the Loan File following information:

 Loan application including, name, amount of loan, purpose of loan, source of repayment,
collateral pledged and all corresponding documents.
 Financial statement or document showing the assets and liabilities of the client.
 Business plan and cash flow projection.
 .Any current loan memoranda; documentation of loan monitoring and supervision;
 Any applicable loan or loan review documents, loan classification memoranda and
citations/notifications.
 Loan Contract, which contains the details of any commitment to extend loan or funds
over some future period.

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 The Microfinance Operational Model and System of CLAFNet

 Only one loan-file per customer, including the information on all loans to the repeat
client who previously received from CLAFNet.
 Financial information (appropriate to the specific loan) on each party to the obligation
(client, endorser, guarantor).
 Spread sheet to be used by the Branch to record data from each annual or interim
financial statement.
 Loan analysis, which is performed by the Credit Officer to evaluate the annual or interim
financial statement of any client;
 Inspection reports/ documents, such as visit reports, employment verification etc.
 Correspondence between the CLAFNet and client;
 Any other information as deemed appropriate by the CEO.

It is a common practice to maintain two files a loan file which contains the loan application & all loan
related information, etc. and ]ii]a collateral file with legal documents. These files should be stored and
safeguard in separate places with adequate security protecting the file.

Chapter 6: Loan Recovery Management

Loan repayment should necessarily be 100 percent & it should also be on time. It has its significance on
the continued viability of the CLAFNet. In fact, real test for CLAFNet & its staff lies in the 100 percent
recovery of all loans disbursed. Accordingly, CLAFNet should convey this message in very clear terms to
all clients at the time of [i] canvassing for lending activities [ii] accepting Loan Application Forms from
clients [iii] documentation, disbursement & signing credit contract [iv] supervising & inspection of
client’s activities & [v] receiving monthly interest. In short, Credit Officer and Branch Manager should
create adequate awareness among clients for cent percent repayment of loans.

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 The Microfinance Operational Model and System of CLAFNet

Month-wise-Client-wise Chart

Branch Manager should prepare a month-wise chart indicating client-wise dates of repayment of loans.
He/ She should send a written communication to each client one week in advance to concerned client
reminding him/ her for repayment of specified loan amount on the stipulated date. Copy of this letter
should also be sent to client’s guarantor for his/her information and readiness to repay the loan in the
event client fails to repay. This advance intimation should help client to make proper arrangement for
getting money to repay the loan on the stipulated date. CLAFNet must appreciate that when loan maturity
period for most of the loans is 6 months, it is possible that clients may forget or they may be out of town.
Credit Officer should once again contact personally clients before few days from the due dates of
repayment of loans and get first hand information and client’s attitude towards repayment of loans.

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