Banking on SMEs

Once a security guard of a major bank turned away a notso-well-dressed individual at the door, saying the CEO and others were too busy to meet him. He had wanted to meet officials to explore ways of getting a loan.

Years later, the man became so successful – and now dressed in all his finery – that the guards welcomed him with smiles and a good morning sir, when he walked into the bank.

Many such business ideas are lost because banks are not willing to take a risk in providing a loan for an idea or an SME, deciding that they could be a liability and high-risk borrowers. This story was related to me by Kalabala Silva, the often agitated academic, during a Thursday morning call.

“It’s unfortunate that small and medium-sized businesses (SMEs) suffer due to lack of capital, even though they have a good idea and a marketable business proposition, because the banks will simply not budge without collateral, which these individuals don’t have,” he said.

“One of the problems is that the two development banks – the DFCC and NDB – which were created for the purpose of development banking and catering to SMEs are today commercial banks,” I said.

DFCC was established in 1955 with a mandate to spearhead development financing in Ceylon, then a newly independent nation, while NDB (formerly known as National Development Bank) was set up in the post-1977 economic reforms period for the same purpose. Now, they are fully fledged commercial banks and have the same loan conditions as any commercial bank.

The biggest problem for SMEs has been the access to financial capital. “The banking sector relies on collateral, which most of them (SMEs) cannot easily pledge. There is a great opportunity to promote digital technology and support financial inclusion by efficiently addressing the asymmetry of information and expanding service outreach in rural areas. Likewise, financing opportunities for entrepreneurial activities could be diversified through capital market instruments and credit guarantee support,” a recent ADB report said.

As I dwelt on these issues, there was a commotion at the gate. The trio had surrounded Aldoris, the ‘choon- paan karaya’, who had come with breakfast food in his tuk-tuk. “Mata me viyaparaya thavath karanna be. Hemadekama, paan piti, seeni, indanawala, mila wedi wela. Apita godak padui. Mage adayama madi mage pavulata kanna denna (I can’t do this business anymore. Everything has gone up in price like wheat flour, sugar and fuel. We are losing money and I don’t have enough income to feed the family),” he said with a tinge of sadness.

Aldoris has a small bakery and like most SMEs has struggled during the COVID-19 pandemic, trying to sustain the business in the midst of lockdowns and curfews and lately, the shortage of diesel, power cuts and the sharp increase in flour and other raw material prices.

“Apita dukai oyage viyaparaya navaththuvoth. Kohoma-hari digatama karagena yanna (We will be sorry if you close your business. Please try and continue),” pleaded Kussi Amma Sera.

“Oya gena kaema hondai, aluth (Your food items are of good quality and fresh),” noted Mabel Rasthiyadu.

At this point, Serapina asked whether Aldoris could not get some financial capital to sustain and grow the business. “Kohomada Miss mata nayak ganna puluwan. Mata idamak ho wenath deyak nene nayata thiyanna (How can I get a loan, Miss; I don’t have any land or some asset to offer in return for a loan),” he said.

Peter D Almeida, Founder and former CEO of N’able (Pvt) Ltd, during a recent discussion said Sri Lanka’s banking system is not geared for entrepreneurship. “Banks don’t encourage entrepreneurship in Sri Lanka. They look for the company assets for security purposes and the balance sheets for evaluation criteria.” Even during the pandemic, it was Sri Lankan banks that made enough and more profits as much as triple the amount they made before the pandemic, he said.

SMEs make up a large part of Sri Lanka’s economy, with reportedly over one million SMEs accounting for nearly 90 per cent of all businesses.

According to Dr. Ravi Bamunusinghe, a SME Business Adviser/Coach, there is a need to increase the SME contribution to GDP considering the current economic status of the country. He says they make up a large part of Sri Lanka's economy and are an essential source of employment opportunities contributing to 45 per cent of jobs in the country, showing that SMEs play an important role in promoting inclusive growth.

According to another report, the main issue faced by the SMEs during the pandemic was the breakdown of their supply chain due to lockdowns and curfew. Working capital was also an issue as they didn’t receive payments for goods supplied while other income sources also dried up.

An October 2020 report by the World Bank-affiliated International Finance Corporation on the plight of SMEs during the pandemic noted that SMEs experienced widespread business impacts often with limited differences among maleowned, female-owned or jointly owned companies.

Some general overall impacts include: Two-thirds of SMEs reported a decrease in demand for their products or services since COVID-19 and almost three-quarters reported decreased sales, with companies in the agriculture, manufacturing and construction sectors hit the hardest, followed by the services sector. Almost two-thirds of those that experienced decreased sales saw a drop of more than 25 per cent on their pre-COVID monthly average.

Eight out of 10 SMEs experienced difficulties meeting operating expenses and had some shortfall in debt repayment or ability to meet financial obligations due to COVID-19, the report added, noting that notwithstanding these challenges, almost three-quarters of SMEs predicted they would continue to operate indefinitely under the current circumstances, after companies operating in the services sector reported the least certainty in terms of continued operations, with over one-third reporting a pessimistic outlook for continued operations.

While SMEs were among businesses that were offered Central Bank-regulated moratoriums on loans taken and given refinance facilities, the financial support is not enough to keep these organisations afloat, meet their operating expenses and pay the salaries of workers. In the present fuel and power crises, a number of small restaurants and tea shops have put up their shutters unable to operate during long-winding power cuts.

As I wound up my column, Kussi Amma Sera walked into the office room with a plate of ‘ kimbula buns’, saying “Mama balaporoththu wenawa Aldorista eyage viyaparaya karagena yanna puluwan wewi kiyala (I hope Aldoris continues his business).”

“Mamath eka balaporoththu wenawa (I hope so too),” I said, reflecting on the large number of small businesses struggling initially due to the pandemic and now a bigger blow dealt by the power and energy crisis.