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1
Enabling Mechanisms to Facilitate Greater Access to Finance for SMEs
Ananda Silva Deputy Governor
Central Bank of Sri Lanka
Future Strategic Direction: The Big Picture for SMEs in Sri Lanka
3
Robust Economic Growth……• The economic growth remained robust and
average growth remain around 7-8%• All sectors have contributed to growth, yet,
industry and services sectors constitute bigger share and contribute more to growth
Major Sector2012 (a) 2013 (a) 2014 (a)
Annual Q1 Q2 Q3 Q4 Annual Q1 Q2 H1(a)
Agriculture 5.2 3.4 -1.1 7.2 10.4 4.7 0.2 6.5 3.1
Industry 10.3 10.7 10.1 8.1 10.7 9.9 12.6 12.2 12.4
Services 4.6 4.3 6.6 7.9 6.5 6.4 6.5 5.8 6.1
GDP 6.3 6.1 6.8 7.9 8.2 7.3 7.6 7.8 7.7
GDP and Sectoral Growth Rates – Estimates 2012-2014
The economy is expected to grow by around 7.8% in 2014
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Continued Increase in Export EarningsExport Performance
CategoryYear-on-year
Growth (%)Cumulative
Growth (%)Jul-13(USD mn)
Jul-14(USD mn)
Jan-Jul-2013(USD mn)
Jan-Jul-2014(USD mn)
1. Industrial exports 713 798 11.9 4,667 5,349 14.6
Textiles and garments 372 414 11.3 2,373 2,827 19.1
Rubber products 68 80 17.4 465 517 11.1
Tea Products 91 99 8.5 523 620 18.6
2. Agricultural exports 143 153 7.4 828 989 19.4
Tea-bulk 45 48 8.5 297 324 9.2
Coconut 18 35 94.4 103 199 93.4
3. Mineral exports 2 3 12.3 14 48 248.0
4. Unclassified 1 1 -10.7 7 8 15.4
Total exports 859 955 11.1 5,516 6,394 15.9
Role of SMEs individually and as a part of the supply chain of large companies, plays a significant role in generating export revenue
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Growth in Tourism…..
Monthly Tourist Arrivals (2011 - 2014)
2011 2012 2013 2014
First 8 months Avg 66,475 77,601 98,656 125,205
Monthly Avg. per year 71,331 83,800 106,216
During first 8 months of 2014 tourist arrivals grew by 23.1% to 1,001,643
Earnings from tourism grew by 32.1% to US$ 1,447.2 mn during the first 8 months 0f 2014
Continuous increase in tourist arrivals creates ample opportunity to related SMEs to boom
Sri Lanka is currently well entrenched in a “virtuous cycle” and a conducive investment environment…
Low inflation
Real interest
rates
Enhanced savings
Regular pipeline of investments
Sustained growth
Low debt levels
Low fiscal deficits
Sri Lanka is currently experiencing a “virtuous” cycle
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High inflation
High interest
rates
Low investor
confidence
Sluggish investment
Low Growth
High debt
levels
High fiscal
deficit
Sri Lanka was trapped in a “vicious” cycle for more than 5 decades
7
Jan
-09
Mar
-09
Jun
-09
Au
g-0
9N
ov-
09Ja
n-1
0A
pr-
10Ju
n-1
0S
ep-1
0N
ov-
10F
eb-1
1A
pr-
11Ju
l-11
Sep
-11
Dec
-11
Mar
-12
May
-12
Au
g-1
2O
ct-1
2Ja
n-1
3M
ar-1
3Ju
n-1
3A
ug
-13
No
v-13
Jan
-14
Ap
r-14
Jun
-14
Sep
-14
5.0
7.0
9.0
11.0
13.0
15.0
17.0
19.0
21.0
W.A._Yield_364 W.A._Yield_182 W.A._Yield_91
(%)
WAYR of T-bills Primary Market
1 2 3 4 5 6 7 8 9 10 115.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
12.00%
13.00%
14.00%
End Dec 2012 (s) End Dec 2013 (s) End Sep 2014 (s)
End Dec 2012 (p) End Dec 2013 (p) End Sep 2014 (p)
Government Securities Primary Rates Vs. Secondary Market Rates
Downward Adjustment of Interest Rates
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Aug '11 - July '12 Aug '12 - July '13 Aug '13 - July '14 0
200,000,000,000
400,000,000,000
600,000,000,000
800,000,000,000
1,000,000,000,000
1,200,000,000,000
1,400,000,000,000
Less than 3 Yrs. 3-5 Yrs. Above 5 Yrs.
T-Bond Secondary Market Outright Transactions
Investors - Long Term Approach: Increased availability of long-term funds
In that background, Sri Lanka’s per capita income is expected to surpass US$ 4,000 by 2015, while the GDP would reach US$ 100 bn in 2016…
$981
2003
2011
2013
2015
$2,836
$3,280
$4,240(Projected)
$4,825(Projected)
2016
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GDP US$ 67.2 bnGDP US$ 59.2 bn
GDP US$
18.9 bn
GDP
$ 88.7 bn
GDP
$ 101.8 bn
ProvinceBranches as
at Sep '14Population
Density as at Sep '14
Western 1,227 5,836 21.0
Southern 408 2,473 16.5
Sabaragamuwa 262 1,925 13.6
North Western 312 2,378 13.1
Central 331 2,568 12.9
Uva 186 1,265 14.7
North Central 204 1,264 16.1
Eastern 262 1,558 16.8
Northern 230 1,062 21.721.0
16.5
13.6
13.1
12.9
14.7
16.1
16.8
21.7
Banking Density (No. of branches per 100,000 persons)
Improved Access to Finance Through Expansion of Banking Network
Required to open 2 branches outside Western Province to open branch in Western Province
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SectorAmount Outstanding, Rs Bn Share of Total Loans, %Dec'13 Mar'14 Jun'14 Dec'13 Mar'14 Jun'14
Agriculture & Fishing 422.8 400.4 393.4 12.3 11.8 11.5 Manufacturing 391.1 376.1 376.6 11.4 11.0 11.0 Tourism 95.7 102.2 112.4 2.8 3.0 3.3 Transport 95.4 88.0 85.4 2.8 2.6 2.5 Construction 500.7 512.3 533.4 14.6 15.0 15.6 Traders 538.0 538.9 524.3 15.7 15.8 15.4 Services 36.5 35.9 44.1 1.1 1.1 1.3 Financial and Business Services 144.2 137.0 137.3 4.2 4.0 4.0 Infrastructure 217.4 200.9 234.5 6.3 5.9 6.9 Other Services 106.9 114.8 120.8 3.1 3.4 3.5 Consumption 877.7 897.7 850.2 25.6 26.4 24.9 TOTAL 3,426.6 3,404.2 3,412.4 100.0 100.0 100.0
Expansion Observed in Construction and Tourism Sectors Provide Opportunity for Related SMEs to Emerge
Sector-wise Credit Exposures from Licensed Banks
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Higher Portion of Corporate Loans Granted by Banks are Less than Rs. 1 mn
No. of Facilities Amounts
Although number of loans granted to SMEs are a higher portion of total number of loans, those represents a very low share of total loan portfolio
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AmountsNo. of Facilities
Corporate Loans Granted by Licensed Commercial Banks Less than Rs. 5 mn
Up to Rs, 5 mn : 85% of facilities Up to Rs, 5 mn : 14% in
value
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Agriculture and Animal Husbandry Sector
• Second Perennial Crops Development Project - Revolving Fund (SPCDP-RF)
• Tea Development Project - Revolving Fund (TDP-RF)
• “Viskam” Credit Line for Development of Commercialised Agribusiness1
• New Comprehensive Rural Credit Scheme (NCRCS)
• Commercial Scale Dairy Development Loan Scheme (CSDDLS)
Micro, Small and Medium Enterprises Sector
• Self Employment Promotion Initiative Loan Scheme (SEPI)
• Awakening North Loan Scheme – Phase II (ANLS-Ph II)
• Resumption of Economic Activities in the Eastern Province Loan Scheme – Phase II (REAEP-Ph II)
• Resumption of Economic Activities in the Eastern Province Loan Scheme – Phase III (REAEP-Ph III)
• The Prosperity Loan Scheme (“Saubagya”)
• Provincial Development Credit Scheme
• Post Tsunami Coastal Rehabilitation and Resource Management Programme (PTCRRMP)
Microfinance Sector
• Small Farmers and Landless Credit Project - Revolving Fund (SFLCP-RF)
• Poverty Alleviation Microfinance Project - Revolving Fund (PAMP-RF)
• Poverty Alleviation Microfinance Project II (PAMP II)
• Poverty Alleviation Microfinance Project II - Revolving Fund (PAMP II-RF)
• Dry Zone Livelihood Support and Partnership Programme - Revolving Fund
• Small Holder Plantation Entrepreneurship Development Programme (SPEnDP)
• National Agribusiness Development Programme (NADeP)
CBSL Contribution Towards SMEs – Lending Programmes various programmes
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CBSL Contribution Towards SMEs – Lower Risk Weight for Exposures on SMEs
25% allowance on RWA provided for banks on accommodations granted to SMEs which satisfy below criteria
The maximum exposure in the case of SME loans would be Rs.35 million at the time of first granting.
In order to qualify as an SME, the firm’s annual turnover should not be more than Rs.140 million.
The annual turnover should be based on the latest available audited financial statements at the time of granting the facilities.
If audited financial statements are not available, the draft accounts may be used. However, the audited financial statements should be obtained during the year.
The qualifying criteria is given above should be reviewed in respect of each financial year.
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Introduction of New Digitalized Fund Transfer Mechanisms
With the approval of the Central Bank, non-bank telecommunication operators also have introduced mobile phone-
based e-money systems in Sri Lanka to effect real time low value transactions.
In order to promote safety and effectiveness of mobile payments services and thereby enhance user confidence of
such services the Central Bank issued two mobile payment guidelines specifying broad principles and standards to be
followed by institutions providing mobile payment services.
I. Mobile Payment Guidelines No.1 of 2011 for the Bank-led Mobile Payment Services
II. Mobile Payment Guidelines No. 2 of 2011 for Custodian Account Based Mobile Payment Services.
The Central Bank assisted in the establishment of Common Card and Payment Switch, which is a technologically
advanced common settlement system to facilitate interbank settlements of electronic retail payment systems in Sri
Lanka. With the introduction of this common infrastructure, financial institutions will be able offer attractive
electronic retail payment products to cater to all segments in the economy.
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Penal Rate Reduction….. Banks were used to charge penal rates ranging up to 36% to 48%
p.a. worsening the financial position of borrowers facing financial distress
Considering the above CBSL had capped penal interest rate charged on all loans and advances at a maximum of 2% from 1st of August 2013
This allows some breathing space to companies in financial distress to rectify their concerns and removes the undue burdens to overdue borrowers
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Macro Economic Developments Contd.….
Declining Trend in Interest Rates Declining Trend in Private Sector Credit
2020 GDP
2013 GDP
Agriculture Agriculture FishingForestry Livestock
Industry Mining and Quarrying ApparelOther manufacturingElectricity, Gas and Water Oil and gas explorationMarine and Aquatic resources Technology and innovationConstruction
Services Wholesale and Retail Trade Hotels and Restaurants Transport BankingCommunication and IT Insurance Real Estate HealthcareEntertainmentEducation servicesOwnership of Dwellings Government Services Private Services
Sri Lanka: 2020 targets a macroeconomic framework which would reflect several new drivers in the GDP computation tables…
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• Colombo – Container mega hub
• Hambantota – Free port, Service and Industrial port declared as a “Free Port”
• Galle – Leisure Port
• Trincomalee – Port-related industries and Port City
• Oluvil – Commercial and fisheries
• Kankasanthurei and Point Pedro – Regional ports
• Second international airport at Mattala
• Modernisation and the 2nd Runway at BIA
• Upgrading of domestic airports
• Colombo as a regional logistics and services hub
• IT literacy and internet access for all• Creation of knowledge-based jobs• Promotion of research and innovation• Sri Lanka as an “education” destination• Accredited foreign universities
in Sri Lanka
• Develop renewable energy sources
• Oil exploration and production – (Mannar, Cauvery, Southern waters)
• Develop oil trade related ancilliary services including gas
• Sri Lanka as a top centre in the region for commercial services
• Growth of ports and tourism will catalyse the development of Sri Lanka’s commercial sector
• Arrivals target of 4.5 mn by 2020
• Earnings from Tourism – to increase to US$ 6.0 bn by 2020
Sri Lanka: 2020 targets the continuous growth of its NEW ECONOMIC DRIVERS based on the ‘5 Hubs ++’ concept…
Sri Lanka: 2020 targets a greater bias towards export of services…
– Tourism services– IT/BPO services– Aviation services– Maritime services– Knowledge economy services
Item 2013 2016 2020
Merchandise Exports 10.4 15.9 21.4 of which Tea 1.5 2.2 2.5 Rubber 0.1 0.2 0.3 Textiles & Garments 4.5 5.6 8.0 Rubber products 0.8 1.2 1.5 Gems, Diamonds & Jewellery 0.4 1.0 1.5
Services Exports 4.7 9.3 12.3 of which Earnings from tourism 1.7 4.1 6.0 Port and Airport related services 1.0 1.5 2.0 IT/BPO services 0.6 1.0 2.0 Oil and Gas - 0.5 3.0
Workers’ remittances 6.4 8.3 10.5Foreign Direct Investment 1.4 2.8 4.3Long term loan inflows
Government 1.6 2.2 2.7Private sector 0.7 1.0 1.2
External Account Targets & Projections for 2016 and 2020 (Per Annum Value, US$ bn)
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Objectives of Secured Transaction Registry
One of the difficulty in accessing finance is finding sufficient/quality collateral
This largely impacts on SMEs and woman entrepreneurs
Secured transaction Registry largely contribute to eliminate these constraints and support economic activities
STR- to Provide More Access to Finance
Initiatives to address deficiencies in the existing framework
STA and other relevant legislations will be amended with the technical support of the IFC.
Amendments to STA includes; - Broader definitions to movable properties - Mandatory registration - Precise and perfect priority rules - Enforcement mechanism for security rights - Rights and remedies of secured parties
Amendments to other legislations - Mortgage Ordinance - Trust Receipts Ordinance - Prescription Ordinance - Registration of Documents Ordinance - Finance Leasing Act - Inland Trust Receipts Act
Amendments to Existing Secured Transaction Act (STA)
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Expectation Removing barriers to a wide range of financial services to unleash private enterprise productivity and help reduce the size of the informal sector.Effective, enforceable and user-friendly registration systems.
Greater access to credit, better ratings of financial system stability, lower rates of non-performing loans, and a lower cost of credit.The end result is higher productivity and more growth.
Expectation Through Amendments to STA
Micro Finance Act
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Proposed Framework
Three-tier regulatory and supervisory framework that will be applicable to Microfinance Institutions (MFIs) in Sri Lanka which accepts deposits from the Public
Large scale MFIs in Tier I will be brought under the direct supervision and examination by the CBSL.
Small MFIs in Tier II will come under the supervision and examination of Central Bank approved audit firms who will support the Bank to take necessary enforcement of regulatory action in respect of those MFIs.
Tier III MFIs falling under the Commissioner of Cooperative Development, Registrar of Cooperative Societies, Divineguma Department and Board of Management of Divineguma Community Based Bank and Banking Societies and the Commissioner of Agrarian Development will be exempted from the Central Bank regulation and will come under the regulation and supervision of the authorities already empowered under the Statutes.
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Further measures to expand availability of funds and utilization
Two investments banks to raise over 10 year tenure long term foreign development finance up to US$ 250 Mn each to provide long term funding for SMEs
Government to underwrite the exchange rate risk
Exemption from income taxes for interest income earned on such lending
Setting up SME Centres
• As the economy becomes broad-based and diversified, so should SMEs• Financial institutions need to look beyond traditional
business activities and broaden the availability of types of facilities• Creation of funds to support new ventures to facilitate financial difficulties faced
by emerging SMEs• Banks and finance companies to support resolution and revival of SMEs
• Private equity funds looking for investments opportunities to consider SMEs with potential• Separate SME board at CSE to allow SMEs to be listed to enhance
transparency
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Way Forward…..
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