The SME sector which contributes around 50 percent of the GDP and accounts for around 90 percent of the businesses in Sri Lanka has been identified as a vital sector to boost growth and social development. Access to financing has been a key obstacle for SME entrepreneurs to get started and move on to the next stage of business. Much has been spoken about funding the sector and many lenders have extended a helping hand but the problem still persists due to collateral based lending which is an impediment for the sector.
Lack of institutional support and policy inertia too have further reduced the potential contribution of SMEs to the economy.
A task force comprising business people, members of Chambers and Industry, members of the academia, bankers and government officials was set up by the Ministry of Industry and Trade to develop a policy framework for SME development in Sri Lanka. Sunday Observer Business spoke to Sanasa Development Bank (SDB) Chairperson Samadanie Kiriwandeniya and COSMI President Nawaz Rajabdeen to seek their views regarding the moratorium on loans taken by SMEs
Blanket moratoriums could be counterproductive
The assistance extended to Small and Medium Sector (SME) enterprises by the Government by way of low interest loans and moratoriums on repayment to those affected by the Easter attacks is a good move, but blanket moratoriums could also be counterproductive without a long term strategic plan to help the sector which is vulnerable to internal and external shocks, said Sanasa Development Bank (SDB) Chairperson Samadanie Kiriwandeniya.
She said concessions for SMEs are crucial to develop the sector but in opening up relief programs such as the ones extended to those affected by the April attacks, should be well thought out to ensure the neediest benefit.
If not, even those who do not need assistance could get on to the bandwagon to gain undue benefits.
“Extending moratoriums to all could affect banks and financial institutions that would make them reluctant to provide concessions to all in the sector.
Banks and the financial sector can be affected if loans are written-off and these institutions could be compelled to charge from customers to make up for the concessions. Banks and lending institutions should be given the discretion in granting relief to SMEs,” Kiriwandeniya said.
“Looking at the external environment, there is no clear path for the SME sector to grow due to the constantly fluctuating policies when governments change. There needs to be a consistent national framework.
The best way to groom the sector is to connect the sector with upper level businesses in the value chain,” Kiriwandeniya said, adding that building market links and supporting them in the value chain are essential to develop a vibrant sector.
With regard to the role of the SDB in SME development, Kiriwandeniya said the bank works with micro entrepreneurs in the rural sector to help them have organic growth.
The bank helps SMEs to connect with market suppliers. It provides training to entrepreneurs of the sector and has groomed the staff to look at cash flows rather than focusing too much on securities in granting loans to the sector.
“Sanasa International, an entity of SDB, conducts a pilot project with Canadian assistance to provide value chain financing,” Kiriwandeniya said.
The sector has gained recognition as a major source of employment, income generation, poverty alleviation and regional development in the agriculture, mining, manufacturing, construction and service sector industries.
However, despite the various policy reforms and support programs by the private sector, the SME enterprises are less dynamic and underdeveloped compared to its sector in the region,such as South Korea, China and India.
SMEs play an important role in promoting inclusive growth. It is estimated that Sri Lanka has over 500,000 SMEs, each employing around three to five persons on average.
Relief package, a welcome move
The Government’s approach towards this most important economic sector is encouraging and with an effective support structure, the country will have far reaching benefits in the long run, President, Confederation of Micro and Small Industries (COSMI), Nawaz Rajabdeen said.
“We welcome the measures taken by the Government to revive the SME sector which is a vital component of the economic drive. As the sector faces severe financing difficulties, the relief package introduced by the Government is a welcome move. Many enterprises are crippled due to the lack of capital and adequate resources to sustain and expand ventures to become a sizable operation.
The Government’s proposed rebate scheme which also includes providing Rs. 300 million as working capital with concessionary repayment terms is an important decision to boost the capacity and abilities of ailing enterprises which are starved of funds. The tax reduction in terms of VAT and simplification of the tax system is a move in the right direction.
While appreciating the Government’s efforts to stimulate the growth of the SME sector, we urge the Government to reconsider the timeline given for the enterprises to meet the requirements. Though, the Government extended the deadline from end January to end February, we feel that time is not sufficient to provide all the documentation necessary to process the facilities as it takes considerable time to produce proper documentation.
Therefore, we propose that the Government should further extend the period given to submit the application until end of June to enable a large number of enterprises to seek the support given by the Government. It is not only the enterprises, but the banks also need time to study the documents, including rhe financial performance and collateral furnished and this is a detailed process requiring considerable time.
It is also necessary to lay emphasis on the SMEs operating in the North and the East to which minimal attention have been paid over the years. These enterprises are in dire straits without access to funding and supportive structure to perform. As there are a large number of micro and SMEs in the region it is important to address their long standing issues in going forward.
The State banks have been called upon to support the Government debt relief package effectively to achieve the end results. However, due to lack of awareness about this facility, it is not very popular among enterprises. This highlights the need for credit awareness and this message should go to the regions for the sector to benefit .
Overall, the Government has done a tremendous job in addressing the long overdue issues in the SME sector and it is hopeful that these measures will continue until a vibrant economic segment is created. This has given the confidence for the sector to continue and grow their businesses.”