Sri Lanka’s commercial banks are modernizing lending systems to make it easier for Small and Medium Enterprises (SMEs) to get loans without worrying about collateral issues, to enhance their business, purchase new machinery or modernize factories, a senior Finance Ministry official said. The key is to create a suitable enabling environment and ease of access to credit to all SMEs, he added. When providing credit to SMEs, the banks have to apply a cash flow-based lending process and consider project viability without pressurizing entrepreneurs to furnish collateral. However he noted that some banks are still following the traditional lending process going through different approval stages and requiring substantial collateral rather than applying cash flow-based lending processes, he revealed.
The lengthy approval process and the absence of collateral and reliable book records of many SMEs, however, make lending either unattractive or un-accessible to a significant number of creditworthy companies, he added. While SME access to credit may be reasonable through commercial banks in the growth zones of Colombo and Gampaha, the commercial banks have not fully penetrated the market potential in rural Sri Lanka, he said. SMEs account for about 97 % of all industries in Sri Lanka but face difficulties in getting loans. Studies show that a large number of small scale entrepreneurs face numerous challenges when setting up their ventures due to limited knowledge and skills in financial management and other operational matters, he added.
Indika Ranaweera, Business Head - SME, National Development Bank (NDB), told the Business Times that NDB’s lending to SMEs are solely based on project viability and cash flow of the company. NDB provides credit to entrepreneurs if the bank is satisfied with the cash flow and their capability to repay the loan. He noted that it is important that financial resources allocated for SME support have a maximum impact. Assistance needs to be directed towards SMEs most likely to succeed, grow and generate more employment, rather than blanket assistance to all SMEs. For this, better information needs to be gathered regarding the capabilities and competitiveness of the country’s SMEs, in order to identify top performers, he said. The bank evaluates the viability of the SME project before approving the loan facility, he said.
Mr Ranaweera noted that the Credit Information Bureau of Sri Lanka (CRIB)’s recent introduction of a state-of-the-art ‘Secured Transaction Registry' (STR), paving the way for SMEs to borrow using moveable property as security will also help banks evaluate the repayment capacity of entrepreneurs . The banks refer to CRIB to find out as to whether the SME loan applicant is a defaulter or not.
NDB is one of the eight financial institutions that have been selected to participate in a US$57.4 million World Bank project that supports Government's efforts to improve access to finance for Small and Medium Enterprises (SMEs), he revealed. Under this programme, participating financial institutions will be required to implement a technical assistance program to strengthen their SME banking capability over time and to provide capacity building to SMEs.
SMEs with an annual turnover of less than Rs 300 million operating in a large number of sectors are eligible to apply under concessionary interest rates, he revealed. The maximum amount of refinancing for any sub-project is Rs. 60 million. The repayment period for permanent working capital loans is three years and the repayment period for investment loans is up to 10 years, including a maximum grace period of two years.