Sri Lanka’s private commercial banks have significantly surpassed state-owned banks in funding Small and Medium Enterprises (SMEs) in 2012, a stark contrast to the situation in 2011, the latest annual report of the Ministry of Finance and Planning showed.

According to the data compiled by the Department of Development Finance of the Treasury, eight private banks have provided a total of 231.5 billion worth of SME funding during 2012 as opposed to Rs.34 billion provided by four state banks.

“It is encouraging to note that private banks have invested in SMEs more than state banks in 2012, underscoring a greater public and private sector participation in the development of SMEs,” the annual report noted.

Commercial Bank PLC has been the single largest lender to SMEs during 2012 with Rs.95.5 billion worth of loans, followed by Hatton National Bank PLC with Rs.62.6 billion worth of loans.

The two development bankers DFCC and National Development Bank (NDB) have lent Rs.20 billion and Rs.11.9 billion to SMEs in 2012.

Nations Trust Bank PLC, the banking arm of the blue chip John Keells Holdings has given away Rs.16.5 billion in SME loans while Sampath Bank PLC has lent Rs.11.3 billion worth of SME loans.

Union Bank of Colombo, which aspires to be a key SME sector financier in the country, has given away Rs.11.6 billion in SME loans, while Sanasa Bank, a micro financier has lent Rs.1.5 billion.

The majority of funding from both private and state banks has gone to industries sector SMEs followed by services and agriculture sectors. Approximately Rs.191 billion has been provided to SMEs during 2012 for these three sectors by private and state-owned banks.

The government directed banking institutions in the tax reforms implemented in 2011 to set up dedicated Investment Fund Accounts (IFAs) in support of SMEs.

 The two state commercial banks are expected to set up dedicated SME bank branches in every district to promote project financing and development banking. Meanwhile, tax incentives have been offered to private banks, to prompt banks to follow this direction.

In the 2012 budget, it was proposed that interest income from SME banking and other fee levying activities will enjoy a reduced income tax rate of 24 percent from the standard 28 percent and a government guarantee of 50 percent for those banks that provide loans to restructure SMEs to improve performance.