Delivery Methodology

"The average amount of time between a loan application and its disbursement is five days, and is as little as one to two days for repeat clients (unless the applicant's previous loan was for business or consumer purposes, in which case SEWA will undertake a more formal evaluation). Typically, unless a loan is secured, clients must establish a savings record with SEWA before taking a loan. In rare cases, clients can obtain a loan without prior participation in a savings program if they are members of the Bank and can produce adequate collateral. A client can make savings deposits through a variety of methods. She may go directly to SEWA Bank, pay the mobile collection unit (which travels to the communities SEWA serves once a week), or pay at one of six satellite offices. Most clients save at least four to six months to be eligible for a loan.

"Approximately one month after the loan is disbursed, a loan officer conducts a site visit to verify loan use. If a client is found to be using a HUDCO-financed Paki Bhit loan for another purpose, her interest rate is increased to 17 percent. On the other hand, if a client decides to use a business loan for housing purposes, the interest rate is not reduced to 14.5 percent. Payments are considered late if the full monthly payment is not made. SEWA accepts partial payments. However, the partial payment is considered as a late payment and tracked as such. If a client misses a payment, the bank officials visit the client. After two missed payments, a late notice listing the amount due is sent to the client and her guarantor(s). After three missed payments, a second notice is sent to the client and her guarantor(s). Often, SEWA will telephone the guarantor instead of sending a notice. Once the loan exceeds the 60-month repayment period, a third notice is sent by registered mail to the client and the guarantor informing them that if loan is not paid, legal action will be taken. SEWA Bank has only taken approximately 200 clients to court.

"A financial analysis of SEWA Bank reveals a mature organization that has reached full financial self-sufficiency, but one whose outstanding portfolio does not match its formidable potential. Highlights of the financial findings are as follows: Please note that the following figures apply to the totality of SEWA's portfolio, and not to its housing portfolio. SEWA does not disaggregate its financial statements based on loan products.

• "Arrears: Based on SEWA's calculation of arrears, 12 percent of the total portfolio is past due and 8 percent of the housing portfolio is past due.

• "Return on Assets (ROA): At year-end 2001, SEWA Bank's return on assets, which expresses the organization's net operational income as a function of its total assets, stood at 10 percent, compared with 13 percent for the three prior years.

• "Portfolio Yield: Portfolio yield was 16 percent. This ratio describes the organization's annual financial income (interest payments from clients, commissions, and arrears penalties) as a percentage of its annual average outstanding portfolio. The yield is therefore a function of the effective rate clients pay, adjusted upwards by penalties and downwards by annual losses.

• "Profitability: SEWA has experienced net operating profits since 1998, with the exception of 2001, when operating losses amounted to just over $28,000. In the five years up to 2001, SEWA Bank's level of operational self-sufficiency had been 250 percent to 300 percent. A similar level of sufficiency is expected for the year ending 2002. In terms of financial self-sufficiency, SEWA Bank has been consistently above 100 percent, with the exception of 2001, when the ratio was 96 percent. Financial self-sufficiency occurs when portfolio yield is able to cover total operating costs, including the cost of capital.

• "Efficiency: SEWA Bank's administrative and operational efficiency indicators are excellent. Administrative efficiency (the sum of administrative costs as a percentage of the average adjusted loan portfolio) in 2001 was 15 percent, up only 1 percent per year over the previous two years. Likewise, its operational efficiency was very good, registering 44 percent in 2001.The operational efficiency ratio, it should be noted, has been steadily declining over the past five years, perhaps because of increased follow-up on delinquent payments.

• "Capitalization:The recommended capital adequacy ratio for cooperative banks in India is 7.5 percent. By comparison, SEWA Bank's capital adequacy ratio for 2000 and 2001 was around 27 percent. This implies that SEWA is overcapitalized and is poised for growth. A second indicator of SEWA Bank's financial capacity is its credit-to-deposit ratio, which stood at 43 percent and 33 percent at year-end of 2000 and 2001, respectively. This indicates that SEWA already possesses the capital to significantly expand its loan portfolio.

"This assessment brings to light several additional findings that may be useful to the future stewardship of SEWA Bank's housing microfinance initiatives. First, SEWA Bank's available financial reports describe an institution that is financially sound. However, when evaluators did a performance analysis, they found the process of sifting through financial information unduly cumbersome. More orthodox methods for calculating loan interest rate, arrears, and for setting loan repayment period would lead to greater accountability and simplify financial reporting. Writing off loans on a regular schedule (or, alternatively, preparing a set of adjusted financial statements reflecting a "cleaned-up" portfolio) would help external analysts understand SEWA Bank in the context of other well-known microfinance institutions worldwide. Second, SEWA Bank is well positioned to increase the size of its outstanding portfolio. Management is well aware of this situation and is planning a major growth drive over the next five years. SEWA can grow its portfolio not only by expanding the current client base, but also through better marketing of SEWA Bank's full product range to its existing clientele. As the institution grows, it will need to further modernize its back-office operations and automate several key financial tracking and monitoring functions. Third, SEWA's housing loan amounts are not based on the cost of the proposed home improvement. Rather, clients receive a preset amount that may exceed or fall short of the amount needed to complete the improvement. This practice is contrary to what many institutions that offer housing microfinance services believe to be an acceptable practice. Assuming client affordability, SEWA Bank should evaluate whether it makes more sense to peg the loan amount to the client's request. Fourth, although the relationship between the Bank and HUDCO may be useful from a political perspective, the cost of capital on HUDCO-financed loans is higher than what SEWA Bank pays for client deposits, and the interest rate is lower than what it charges clients for non-HUDCO housing loans. Given SEWA Bank's low credit-to-savings ratio, it should assess whether its relationship with HUDCO is altogether positive. Fifth, SEWA Bank needs to track its arrears in a more systematic manner. For instance, tracking portfolio at risk (and not just the actual amount in arrears) might provide management with a more complete picture of future losses and help the Bank take remedial action. Sixth, the Parivartan scheme-an alliance of SEWA Bank, the Ahmedabad Municipal Corporation, the Mahila Housing Trust (MHT), and other local NGOs-deserves particular mention for its innovation and its potential contribution to strategies for slum upgrading worldwide. Having established a relationship with participating families, SEWA Bank management believes that these families will be good candidates for future home improvement loans-especially if these families are able to pay for the Parivartan-related improvement through the savings program. Hopefully, by taking these observations into account, SEWA Bank's operations may continue to improve the lives of India's poorest, providing affordable financing for one of the most basic human needs."

Reference: this article is a synopsis of a full case study on SEWA ("Assessment of SEWA Bank's Housing Microfinance Program in India"), and is available, as are all the Series' products, from www.citiesalliance.org.

[Authors: Franck Daphnis, CHF Director of Field Program Operations; Kimberly Tilock, CHF Credit Manager; Matthew Chandy, CHF South Africa Country Director; Ingrid Fulhauber,CHF Consultant. 1818 H Street, NW Washington, DC 20433 USA Tel: (202) 473-9233 Fax: (202) 522-3224 info@citiesalliance.org www.citiesalliance.org]