Breathing space for SMEs
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How often in the past have SMEs/individuals struggled to convince banks and financial institutions to provide a loan without success as they didn’t have the necessary collateral (security) to be pledged against the loan. Who knows there may have been a Bill Gates or Steve Jobs lurking in the corridors of banks hoping for a loan!
This week, the government launched the National Credit Guarantee Institution Ltd (NCGI) offering new financing opportunities for entrepreneurs who struggle to access credit due to lack of collateral.
According to an announcement, this is a collaborative effort between the Ministry of Finance and the Asian Development Bank (ADB), and it functions as a public-private partnership involving 13 private financial institutions. The government holds a 90 per cent stake in the institution’s capital, with the remaining 10 per cent shared among participating banks and financial institutions. The ADB has provided the initial capital of US$ 50 million along with technical support to establish the institution.
Entrepreneurs can access loans ranging from Rs. 500,000 to Rs. 25 million, depending on the financial strength and viability of their businesses. The statement said that as of now, 116 entrepreneurs have already benefited from the facility, with Rs. 500 million in loans disbursed.
This kind of development banking was on my mind, when the home phone rang. Calling on Thursday morning was Arty, the intrepid entrepreneur, and interestingly to discuss the new effort to fund MSMEs.
“I say…….this is a good scheme,” said Arty. “It is and should have been developed a long time ago,” I said.
“So what happens if no applicant has security or collateral, the standard requirement in securing a loan,” he asked. “Well this administering institution provides a credit guarantee to the lending institution against the loan. So no collateral or security is required. The security in this case is the guarantee offered by the NCGI on behalf of the applicant,” I said.
This is much like the entry of development banks in Sri Lanka in the 1950s to 1970s with a mandate to provide loans to enhance the country’s development apparatus.
While the DFCC was set up in 1966, the National Development Bank (NDB) came into being in 1979 essentially to provide project loans on a long-term basis. While commercial banks provided short-term loans requiring security or collateral, development banks offered loans based on a mix of security and, if unavailable, on cash flows. No applicant was turned away. The development banks, set up by an Act of Parliament, received funds from the World Bank and ADB.
These banks had sector managers who were experts in the field and able to advise SMEs, some of whom had little knowledge about their intended business. These sector managers would sit with the applicants and prepare a business plan with intended cash flows.
However, due to the government’s involvement, these banks came under pressure to provide ‘political’ loans without a proper business plan and subsequently both development banks transitioned to commercial banks with shares held by the public.
During the development banking era, in one instance, one of the banks sent a sector manager with a group of plastic manufacturers (bank clients) to visit an Indian plastic plant to learn and acquire knowledge on producing plastic items. The banks, at that time, offered valuable advice to SMEs on efficiently running their business. Such advice included preparing a balance sheet, securing the best deal for raw material and managing staff, among a plethora of other challenges.
The sector manager often acted as a business partner, to ensure that the business funded by the bank would succeed. Apart from the individual entrepreneur, it was the intention of the bank to also ensure the business succeeded, unlike loans taken from commercial banks where a business failure results in the bank simply acquiring the asset that was pledged as security.
In the development banking paradigm, banks worked alongside the client to ensure a business succeeds, whereas in commercial banks, it’s just a client – you fail and you lose your security or collateral pledged against the loan.
There are many experienced development bankers whose advice would be very valuable and who would be willing to help, to ensure the success of the government’s new scheme to fund SMEs.
At this point, craving for a second mug of tea, I walked into the kitchen. Unfortunately, Aldoris, the choon-paan karaya, hadn’t come down the lane and there were no ‘kimbula bunis’ on the table. Picking up my tea, my attention was drawn towards the margosa tree where the trio was drinking tea and ‘having a chat’.
“Aanduwa parana amathilata viruddawa nadu pawaranawa (The government is going after all the former ministers and filing cases against them),” said Kussi Amma Sera. “Mama balaporoththu wenawa egollanta sakshi hondata thiyenawa kiyala weradi weda oppu karanna. Nethnam minissu kiyavi meka deshapalana paliganeem kiyala (I hope they have enough evidence and proof to convict them. Otherwise, it would be seen as just political vengeance),” noted Serapina. “Aanduwa ikmanata yedenna oney ihala yana jeevana viyadama adu karanna (The government should also spend time in tackling the rising cost of living),” said Mabel Rasthiyadu.
Meanwhile, the main objective of the NCGI is to help provide access to credit for SMEs by offering partial credit guarantees of up to 67 per cent, thereby mitigating the credit risk for financial institutions and facilitating increased lending to the sector, according to a government statement.
At Monday’s launch of the credit-access scheme, Central Bank Governor Dr. Nandalal Weerasinghe had called for urgent reforms to strengthen credit access to underserved sectors, particularly SMEs.
Speaking at the event, he said the idea of a national credit guarantee institution first emerged in 2006 but nothing happened after that, praising the government for finally setting up this new institution.
As I wound up yet another column, my wish list was for the government to seek the support of veteran development bankers whose guidance can be valuable in ensuring the success of this new institution aimed at helping budding entrepreneurs with loans sans security or collateral.
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