Banks, govt. reach consensus over SME loan moratorium

On Tuesday, just before Christmas, banks reached a consensus with the government on how to go about the small and medium-sized enterprise (SME) loan moratorium, which had sparked unease within the country’s banking sector.

As the meeting between the banking sector special working group and Central Bank held on Monday fell short to reach a mutually agreeable solution, the parties met with the government officials seeking more clarity and a practical way forward to the proposed loan moratorium.

The banking sector was caught off guard last Friday when the new administration directed the banks to suspend the recovery of SME loans up to Rs.300 million, for a period of 12 months, in a bid to give the struggling sector a lifeline, which is in a precarious financial position at the moment.

The bank chiefs representing the entire sector met with the new government’s economic team, led by Senior Economic Advisor to Prime Minister Ajith Nivard Cabraal, where the banks agreed to suspend the recovery of capital repayment on term loans granted to SMEs for 12 months. 

The SMEs will however have to continue servicing the interest of their loans.

The banks have also agreed to make the moratorium available to SMEs for facilities up to Rs.300 million, irrespective of the sector i.e. agriculture, transport, manufacturing, etc.
It is uncertain as to how small lenders could cope with the loan threshold stipulated by the government but a Central Bank directive expected towards end-January next year on the matter could provide more clarity.

However, no SME will be eligible for the moratorium by default and each one is required to apply for the facility, citing clear reasons.

The agreed structure of the loan moratorium on Tuesday did not differ much from what the government had earlier proposed, as both performing and non-performing SME loan customers could make use of it.

However, the banks will demand a comprehensive business plan from the clients with performing facilities in order to be considered for the moratorium, which depends on the ability of the plan to convince a particular bank.

Meanwhile, it has also been agreed that no additional loan facilities could be applied during the period of the moratorium.

While the SMEs can start applying for the moratorium now, the Central Bank’s directive expected in end-January will advise the banks how to treat the loan facilities eligible for the moratorium and the reporting mechanism.

When matters related to the financial reporting treatment of such facilities came up for discussion, the top two auditors, KPMG Sri Lanka and E&Y Sri Lanka, who were also present at the meeting, had agreed to treat them similar to the moratorium granted to the tourism sector loans after the Easter Sunday attacks.

While a rating review by Fitch Ratings on Sri Lanka’s banking sector is due mid-January, next year, the rating agency is likely to look at the SME loan moratorium in length towards the end of the month.

Fitch Ratings maintains a ‘Negative’ outlook on Sri Lanka’s banking sector, due to weak earnings and asset quality matrices. The banking sector analysts Mirror Business talked to opined that the negotiated structure of the new SME moratorium would bode well for the banking sector and the businesses as it could unshackle the country’s economy from the grips of both monetary and fiscal errors made in the past.

And more importantly, they said, it would send a strong message to the domestic businesses that the government and the banks together are willing to support them until they can stay on their feet and contribute to the overall economic growth of the country.