Credit Fund in Operation

The Janasaviya Trust Fund(JTF)in Sri Lanka works to alleviate poverty in a variety of ways ranging from the provision of grants to carry out communityinfrastructure projects (such as roads and dams)using local labour,to the implementation of programmes designed to improve nutrition levels in pre school children.

The savings and credit aspect of the JTF is carried out by the JTF Credit Fund. The Credit Fund works as an apex organisation which operates its credit scheme by providing funds to Partner Organisations(POs)which in turn are involved in the actual running of the credit and savings programme.

The loans are specifically for income generating projects and the Credit Fund will not finance consumption and other non-income generating activities.

The funds given by the Credit Fund depend on the savings of each PO. The maximum amount of Credit Fund financing does not usually exceed 20% of the PO’s savings.However in special circumstances to be determined by the Credit Fund, funds amounting to 100% of the PO’s savings component will be disbursed.

The funds command an interest rate of a minimum of 7% per annum. The security for the loans to POs will be a series of documents to be signed by the POs setting out a Demand Pro-Note, joint and several indemnity from the office bearers of the Governing Body of the PO and assignment of sufficient movable assets of the PO to cover the loan.

Once the PO has disbursed the funds received by the Credit Fund to the beneficiaries, the Credit Fund will refinance 100% of the loan value.The repayment terms for the PO to the Credit Fund will be 12 months extended to 36 months. An interest penalty of 4% will be charged on loan repayments more than 2 months in arrears.

The Credit Fund will not reschedule the repayment of any loan from a PO except in exceptional circumstances which is when a serious problem has caused a beneficiary loanee to delay repayment. With reschduling the interest rate will be increased to 4% per annum and the maximum period of rescheduling is 2 years.

The disbursing of funds to beneficiaries by the PO is also regulated. The maximum amount of an initial loan to an individual borrower shall not exceed Rs.10,000. Subsequent loans can be increased to four times the first loan but the increasing will be in four equal proportions.

Loans from the PO to the beneficiaries will carry an interest which is set by the PO and reviewed by the Credit Fund every six months. Upon review, the Credit Fund will advise the PO on suitable interest rates which must reflect commercial lending rates and be sufficient to cover the POs administrative costs.

Although there is no ceiling on the interest rate which a PO charges from a loanee, the usual rate is 1% above the weighted average lending rate.

Every loan is subject to a short repayment period that will not exceed 12 months. This is flexible in cases where the nature of the income generating project involves delay in the initial cash flow and in such an instance, the repayment period can be extended up to 36 months.

With the approval of the Credit Fund, the PO may offer interest rebates to certain loanees. The interest rebates will depend on loanees making repayments on time throughout the loan term, using the loans exclusively for the purposes the loan was obtained for and on repayments being made from the proceeds of the income generating project and not from other sources of funds.

The loans do not require collateral or security and are based on the integrity of the borrower and the viability of the project. References from the group are considered appropriate substitutes for asset-based security.

A loanee in arrears of 3 repayments must seek rescheduling of the loan. While the PO reschedules the loane’s repayments, the PO must continue to pay on the original repayment schdule to the Credit Fund.

The credit scheme of the JTF has several accounts catered to serving different purposes.

Loan Loss Reserve: In order to accamodate loan loss due to defaults, every PO establishes a Loan Loss Reserve to which account 20% of the interest earned from loans is credited.The Reserve must be invested in an interest earning bank account.

Credit Insurance Scheme(CIS): To buffer project failure such as permanent disability or death of the borrower, natural disaster, fire, theft and civil disturbances of any kind, the CIS pays a capital sum to the PO. The PO bears the full cost of the insurance premium and does not cast the burden on the loanees. The insurance scheme is linked to the State Insurance Corporation.

The Group Contingency Fund(GCF): The GCF is a savings account owned and managed by the borrowers. 5% is deducted on each loan disbursed and credited top the GCF which is converted into a source of working capital and to provide insurance against project failure.