Banks perturbed by govt.’s SME sector loan moratorium

By Indika Sakalasooriya
Sri Lanka’s banks, which are already grappling with increased bad loans, fear far-reaching negative impacts on the sector from the recent government directive to extend a one-year moratorium on small and medium-sized enterprise (SME) loans.

The Finance, Economy and Policy Development Ministry in a media communiqué last Friday said chairmen and CEOs of banks had been directed to suspend the recovery of loans obtained by SMEs up to Rs.300 million. It added that the move was aimed at reviving the country’s SME sector.

However, up to now it is not clear as to whether this Rs.300 million threshold means the exposure of an SME borrower to the entire banking sector or an individual bank. The banks are yet to receive the official directive from the Central Bank.

“There is no doubt that the SME sector needs some kind of support or relief. But Rs.300 million is substantial. This could result in the banking sector ending up with a mountain of debt next year,” a banker told Mirror Business on the grounds of anonymity.

“This could have a systemic impact on banking sector liquidity with pressure on their cash flows. Banks’ asset quality, already hit by higher non-performing loans, is likely to further deteriorate. It appears that 2020 is going to be a very tough year for the banking sector.”

The communiqué issued by the Finance, Economy and Policy Development Ministry however indicated that the banks could afford this moratorium since the recently introduced tax cuts provide substantial savings to the banks.

It also said the moratorium would be followed by a comprehensive package coupled with already announced tax concessions designed by the Finance, Economy and Policy Development Ministry and the Central Bank, which will support both lenders and borrowers, specially from the SME sector.

The tax reform initiatives announced in late November proposed to do away with the Debt Repayment Levy slapped on the banks along with the 2 percent Nation Building Tax (NBT). Nevertheless, the Value-Added Tax (VAT) on financial services is maintained at 15 percent.

The banks have already extended a one-year moratorium on tourism sector loans after the Easter Sunday attacks in April.

Meanwhile, another banker, who also requested anonymity, said the move could stoke unnecessary consumption-related spending among SME borrowers.

“They (SMEs) are not the most disciplined borrowers. That’s why you see a lot of banks constantly working with them to manage their debt. Since the moratorium is for a substantial amount, it could fuel pointless consumption-related spending among SME borrowers, making their financial position worse in the long run.”

He further said a blanket moratorium could also encourage performing SME sector loans to become non-performing.

Banks have been directed to provide a capital moratorium on performing SME loans and both capital and interest payment moratorium on non-performing SME loans for a period of 12 months.

It will be interesting to see how these developments are merged into the reporting standards of the banks and the viewpoint of rating agencies. 

Fitch Ratings already maintains a Negative outlook on Sri Lanka’s banking sector over rising bad loans, which is up for review in January 2020.

Soon after the new government took office, Prime Minister Mahinda Rajapaksa as the Finance, Economy and Policy Development Minister had convened a meeting with bank chairmen and CEOs and had asked them to come up with proposals to revitalize the sluggish economy.

However, last Friday’s announcement caught the bankers completely off guard.

Bank chairmen and CEOs are scheduled to meet Central Bank officials today to discuss the matter further.

SMEs hail debt relief

The SME sector of Sri Lanka has welcomed the latest initiative by the new government to suspend the recovery of loans obtained by them. 

“The directive by President Gotabaya Rajapaksa and Prime Minister Mahinda Rajapaksa on December 20 addresses the need of the hour for our SMEs and is clearly a timely step in the right direction over the longer term,” Confederation of Micro, Small and Medium Industries (COSMI) Founder President Nawaz Rajabdeen said.

“What is more, we warmly welcome the comprehensive package to be followed for SMEs, which is expected to come anytime. We are very hopeful that this additional package will give a bigger boost to both the lender and the borrower in this sector, which is the lifeline of our economy,” he added. 

COSMI said financing and lack of credit were the key obstacles faced by the Sri Lankan SMEs. 

According to a 2018 Ernst &Young SME survey commissioned by the Industry and Commerce Ministry, 59 percent of the survey respondents had said SMEs were hampered by finances and they were granted loans by established financial institutions at commercial rates.

“We have an unexpected and a surprising Christmas gift for all types of SMEs this year, thanks to the government’s timely decision,” Rajabdeen said.