The case against merger of SME and Lankaputhra banks

By a special correspondent
The action taken by the Government to merge the SME Bank with Lankaputhra Development Bank which will lead to cessation of operations of SME Bank would have far reaching implications on the development of the small enterprise sector. The Chambers of Commerce of Sri Lanka collectively represent interests of small and medium enterprise sector and have a legitimate right to express their views on this move taken by the Government. It appears that the proposed merger would result in closure of the SME Bank shortly. In fact, the Ministry of Finance has already given specific instructions to the SME Bank to stop all new lending activities which clearly show that the merger and liquidation of this banking institution is imminent. Consequently, the SME Bank currently does not entertain any requests for finance from borrowers. This outright decline to accept any lending applications has inconvenienced many small enterprises including members of our Chambers. This abrupt closure of this financing window has frustrated many small entrepreneurs.

Development banking is a different concept. It has a focus on the development of the society through assisting the potential entrepreneurs. So it has an ability of catering a specified/ unique segment of customers.

Unlike other commercial banks SME bank offers loans at a lower interest rates with less collateral documents.

Since SME Banks caters to a unique cluster of customers it has been able to arrange special loan schemes suitable for various segments of the society.

EX:     Bombay onion cultivators in the Dambulla District-Special loans scheme for their storage facilities.

Farmers in the Mahaveli  areas.

Anthuriam growers. (with the coordination of the Export Development Board.)
Ornamental Fish industry.

SME bank does not only offer financial assistance to the people. It successfully carried out training programmes for the potential entrepreneurs with regard to entrepreneurship, product development, marketing, export, HR Management etc.

Unlike the Lankaputhra Bank (which had already disbursed loans of Rs.300Mn each, sometimes) the SME Bank has disbursed loans of from Rs.10,000/- each to Rs.25Mn.The concept is issuing small loans in order to cater to the potential entrepreneurs at village level.

As per the available international experiences (Japan, Malaisia and Korea) normally SME Banks takes  05 to 10 years to make their presence and to show their positive affects on economy. While not adhering to this global truth are we going to close SME Bank before it completes its 02nd year in operations.


The background to setting up of SME Bank
The Government as well as the officials in the Finance Ministry appear to have forgotten the back ground to setting up of the SME Bank. The Government decided to establish the SME Bank following a recommendation made by a SME focussed Cluster Committee of the National Council for Economic Development (NCED) that comprised of private and public sector SME representatives with multidisciplinary skills. This Committee reviewed past and current SME stakeholder submissions in a comprehensive study undertaken in late 2004. The issues recognised by a large cross-section of these stakeholders as factors that impede the development of the sector on a wider scale are listed below.

The collateral depended lending of the banking sector was a main problem faced by the SME enterprises.

High interest rates and low availability of credit has been a main barrier to business expansion and productivity improvement.

Non-availability of institutional equity negatively impacted the borrowing capacity as the required debt/equity ratios could not be met by the SMEs.

Similarly, a survey conducted by ADB revealed that burdensome collateral requirements, absence of a SME business friendly bank and complicated loan application procedures as significant factors inhibiting their access to credit through banks. Absence of business plan based execution strategy and lack of managerial skills were attributed as reasons of business failure consequent inability to repay loans.

In order to address abovementioned debt and equity financing issues, the NCED Committee recommended setting up of a bank for funding and business development needs of small and medium enterprises. The impact of the combination of these factors widely felt within the industry led the Government to make a policy intervention and create a Bank dedicated to funding and entrepreneurship development of the SME sector.

Many Chambers actively canvassed for creating a dedicated bank for financing of the small and medium enterprises due to the abovementioned factors widely experienced by our membership. We did so because there were many business entities among our membership which have found it very hard to obtain credit facilities from conventional commercial banks. As a step to remedy this situation, the Government took action to set up the SME Bank in 2005. The reversal of this very decision of the Government barely within two years by the policy-makers is a matter of surprise to all concerned.
Action taken by SME Bank to Improve supply of Credit to Small Enterprises
The SME Bank followed a strategy to improve the supply of credit to small entrepreneurs. Some of this action taken by the SME Bank to streamline the activities of the bank and reorient its operations to cater for financial requirements of deserving entrepreneurs in the small industry sector is listed below:

The bank has extended large number of loans to small enterprises without any collateral as security. The current practice by commercial banks and other banks to demand 150% of the value of the loans to be secured with a mortgaged asset has severely restricted the borrowing capacity of entrepreneurs. Thus, many investors who could not previously obtain credit facilities have received financial assistance from SME Bank.

SME Bank has granted loans to business clusters such as producers of handloom textiles, growers of cut flowers, paddy millers etc using the industry knowledge of investor groups. All major banks have inadequate numbers of staff with cluster domain enterprise that is required to assess the SME project execution risks and to conduct business development due diligence analysis, develop risk management strategies and supervise implementation recommendations.

SME Bank also engaged in provision of value-added entrepreneur enabling services. As a part of this process, the bank has undertaken regular mentoring and monitoring of borrowers’ business progress.

These are positive SME enterprise friendly practices adopted by the SME Bank which are noticeable to us.

Comments on the Merger of SME Bank
In fairness to SME Bank, it is too premature to pass a sweeping judgements on activities failed to deliver on its anticipated mandate. To close down the SME Bank due to whatever its perceived weaknesses is akin to throwing the baby with the bath water. Moreover, to merge the SME Bank with another bank that has very clearly alienated itself from the small enterprise community is adding insult to the injury.
More disturbing is the arbitrary manner in which the decision to close down the SME Bank has been taken by the authorities. As stated earlier, the opening of the SME Bank was the result of wider consultative process involving the Trade Chambers and other interested parties. However, none of these institutions or individuals who represent business community of Sri Lanka was consulted in making this decision to close down this bank. On the contrary, this appears to be a unilateral decision made at official levels without understanding the ground realities affecting the business community of this country. Such unilateral action and on matters well represented by informed groups such as the Chambers of Commerce is deplorable as they could lead to erroneous policy decisions at bureaucratic level as evident in this case.
The Chambers strongly feel that the requirements that led to the creation of the SME Bank still remain unfulfilled. The same impediments that restricted access of small business enterprises continue to exist up to this date and tend to afflict the small business community in this country. Therefore, correct policy decisions would be to further strengthen the capacity of the SME Bank. From this point of view the closure of the SME Bank is counterproductive measure and definitely going back on a positive step taken in the past.

The development of SME sector should be priority for any government due to many reasons. It would be a misplaced strategy to close down a bank dedicated for lending to small industries