9 August 2021 08:59 am Views - 716
As part of the efforts to propel the industry and enhance its contribution to economic growth, the Information and Communication Technology Agency (ICTA) and PwC Sri Lanka partnered recently to introduce an alternate Credit Evaluation Framework.
This framework, which has been developed in consultation with the ICTA, banking industry and tech industry representatives as well as angel investors, will be adopted by lenders when lending to tech companies with the need for minimal collateral.
Sri Lanka’s information technology and business process management sector has shown a strong performance over the past decade, having grown 108 percent compared to 2013 with a CAGR of 13 percent to reach US $ 1.5 billion in revenue in 2019, thus making it the country’s fourth largest exporter.
The industry’s workforce too grew by 51 percent during the same period, reaching a total of 113,561 professionals. Identified as a thrust sector by the Government of Sri Lanka, the collective vision is to achieve US $ 5 billion in revenue, create 200,000 high skilled jobs and enable 1,000 start-ups by 2025.
PwC COO and Advisory Leader Channa Manoharan stated, “PwC has a first-hand understanding of the challenges faced by technology entrepreneurs from the firm’s deep involvement in the technology start-up ecosystem. Having thoroughly understood the objectives set by ICTA, PwC developed the new credit evaluation framework that is both unique and practical in a local context. For this purpose, PwC brought in deep banking sector insight from a cross functional team of in-house experts to develop this framework.”
The new credit evaluation framework has been built around four pillars: quality of leadership and management, market landscape, potential of the product or service offering and financial soundness of the borrower.
The framework that PwC developed focused on helping lenders understand the quality of the product or service offered by the business, capabilities of the promoters and future growth potential of the business to make a lending decision. Another primary difference is that most existing credit models used in the banking industry has a higher weightage given for past financial performance. Whilst this new framework has similar parameters, there is also the inclusion of assessment criteria in relation to future financial projections, giving lenders a view of the company’s roadmap of future developments and financial milestones.
PwC Sri Lanka Director Deals Kavinda Weerakoon added, “Technology enterprises are generally underserved by banks, which create a funding gap for these businesses. We are thankful for ICTA in pioneering this valuable initiative and having PwC onboard. We are optimistic that this framework will act as a catalyst for lending institutions to provide flexible and innovative financing facilities to develop high-impact, technology-driven sectors of the economy.
He further said that the model encourages lending institutions to have a deeper understanding of the dynamics of the borrower’s business and its industry.
“This insight can help banks better understand the growth cycle of the business and offer innovative customised financing solutions for their customers depending on the stage at which the business is at.”
PwC Sri Lanka Partner Industry Leader for Financial Services Malinda Boyagoda stated, “Financiers are well aware of the potential the start-up tech companies possess in the current economic landscape of the country.
However, the traditional credit risk assessments and thinking has kept this sector largely untapped. This combined effort by ICTA and PwC will provide a fresh perspective in looking at these funding opportunities, which I believe is a great opportunity to banks as well as non-bank lending institutions.” Sri Lanka’s vibrant tech industry has been on a rapid growth trajectory. However, there are challenges specifically related to securing funding for companies at an early stage or during scaling up for growth, due to the requirement for tangible collateral by financial institutions that cannot be met by many start-ups and emerging technology organisations.