The biggest constraint for SMEs advancing in their businesses is the lack of opportunity for credit facilities as under normal circumstances credit is provided on collaterals and the lending institutions insist on immovable properties as collaterals.
That however will be an issue of the past after the Credit Information Bureau (CRIB) this week announced the formation of a ‘Secured Transaction Registry (STR) also known as Movable Assets Registry. Through this Registry movable properties could also be pledged as collaterals to obtain credit which would if properly administered and be a great help for SMEs.
At the launch in Colombo of the STR, it revealed that Secured Transactions have advantages for borrowers and lenders alike – transaction costs are lower and lenders do not need to gather as much information about borrowers.
Loans are transacted on unsecured lending such as borrower offers an unsecured promise to pay, the lender must rely on the borrower’s reputation or trust that the borrower will pay back the loan in order to have access to future loans. The mode of lending is the secured lending such as the promise to repay is backed by collateral that lenders can seize and sell in the event loan payments are not made as agreed. Collaterals can be real estate (immovable) or personal movable property such as inventory, machinery, account receivables, etc.
There are three obstacles that prevent movable property as collaterals – creation of security interest is difficult; the perfection of security interest – the public demonstration of their existence and the establishment of their priority - is not effectively possible and the enforcement of security interests is slow and expensive.
The main function of the Registry Office is to receive, maintain and disseminate information to enable creditors to make informed business decisions about lending secured by movable property, The services provided through the STR system would be: initial registration of notices; continuation, amendment and discharge (termination) of such notices and searching services for current and historical records in the system.
Gamini Karunaratne, Director, CRIB told the Business Times that the STR is to assist the SMEs and said that 80% of the industry consists of SMEs and MFI’s. He said that they have just launched this system and it will come into operation the moment the Act is gazetted.