Sri Lankan banks, finance companies ease SME loan terms
Thousands of Small and Medium Enterprises (SMEs) badly hit indirectly by recent terror attacks and directly by rising costs and dampened domestic demand, possibly due to falling purchasing power, will breathe sigh of relief with the reduction in lending rates.
SME growth and new investments have been greatly affected by inflation, nominal interest rates, the VAT levies, and exchange rate
The Central Bank (CB) has recently requested licensed banks and Non Bank Financial Institutions (NBFIs) to reduce interest rates on deposits and lending products in general, and to SMEs in particular
There will be a 2 per cent reduction in the interest rates granted to SMEs and the CB will closely monitor the behaviour of interest rates of licensed banks and NBFIs on both deposits and loans and take further measures as appropriate in future.
This action will enhance credit flows to the real economy and accelerate monetary policy transmission through the financial sector, a senior CB official said.
In arriving at this decision, the Monetary Board of the CB has considered the representations made by licensed banks and the report of the working group on high market interest rates and issues faced by SMEs.
Banks may exempt credit facilities granted to SMEs up to an aggregate loan limit of Rs. 25 million per SME which are subsequently restructured between 01-01 2019 to 30-06-2020 on the CB directive.
Further instead of temporary over drafts, the banks have been directed to devise financial products to facilitate short –term revolving funding to SMEs assessing the risk and pricing of such products at reasonable at reasonable rates.
A credit scheme has been introduced with the allocation of Rs. 15 billion to enable small businesses to obtain loans at an interest of 6.5 per cent and in some cases 3.3 per cent to fund modernisation and expansion of enterprises, said a senior Finance Ministry official.
He noted that at present one of the biggest barriers to starting a business was the cost of capital. Many young entrepreneurs and SMEs had innovative business ideas but found it difficult to implement at the prevailing interest rate.
He said that a SME guarantee fund was also being set up to enable SMEs with sound business plans to access credit without collateral under the enterprise Sri Lanka scheme.
Banks are modernising lending systems to make it easier for SMEs to get loans without worrying about collateral issues, to enhance their business, purchase new machinery or modernise factories, the official said.
Interest rates on savings and other deposits with tenures less than 3 months offered by licensed banks and NBFIs will be linked to the Standing Deposit Facility Rate (SDFR) whilst longer tenures will be linked to the 364 day Treasury bill rate.
Licensed banks and NBFIs may offer an additional interest rate up to 50 basis points for savings deposits of children under the age of 18 years, and for Fixed Deposits (FD) of senior citizens with tenure of one year or more.
Debt instruments issued by NBFIs will also be subject to maximum interest rates. In spite of these measures, interest rates on deposits are expected to remain competitive, providing a substantial real return to depositors.