Moratorium on SME loans may extend to interest payments

The government is considering extending the 12-month capital moratorium on non-performing loans (NPLs) of small and medium-scale (SME) businesses to interest payments, acknowledging the difficulties in meeting interest payments by some default SME debtors.   

“In terms of NPLs, the initial proposal said that SMEs have to service the interest. However, there’s a doubt as to whether they are in a position to service the interest. Therefore, the Finance Ministry is again looking at that possibility on what they could do,” a Central Bank (CB) official told Mirror Business. 

The government and the CB were earlier planning to restructure these loans, including the unpaid interest, and to charge interest for the 12-month moratorium period. 
SMEs, which have both performing loans and NPLs below Rs.300 million, will be eligible to apply for the 12-month moratorium.

On performing loans, the government and the banking sector have reached consensus to offer a 12-month capital moratorium on the request of customers.

The government is likely to finalise the specifics of the moratorium this week and subsequently the CB would issue a circular to banks by mid or 
end January. 

While stressing the moratorium would have a minimal impact on the banking and non-banking sector, CB Senior Deputy Governor Dr. Nandalal Weerasinghe stressed that the moratorium will be made available only on the request of customers of a bank.

“We undertook a consultative process with banks and relevant stakeholders to strike a balance in assisting struggling SMEs and preserving the banking and non-banking sector. 

The moratorium will be limited to SMEs on request and they will be requested to service interest. In terms of provisions and impairments, the impact on the banking sector is minimal. This move will revive the economy by re-activating some economic activities and will also ease NPLs,” he elaborated. 

The SMEs that want to avail of this facility will have to make a request to their respective banks before January 20.

“There will be some relief for SMEs, mainly on term loans. It will be available on the request of the customer, so we can’t estimate as a share of banking assets. It won’t reduce the cost of borrowing, but will only give some space for a 12-month period to improve their cash flows,” he added. 

Dr. Weerasinghe also noted that there wouldn’t be much of an impact on financial statements of banks due to the moratorium. 

“As per our discussion with CA Sri Lanka and auditors, there won’t be any impact on the financial statements of banks if the banks give a moratorium for performing loans. But if they give some relief for NPL’s, there has to be some adjustment provisions, so that there will be some impact depending on how many people will get that relief,” he said. 

The moratorium will be mostly applicable on term loans taken by SMEs and will not cover short-term export and import credit. 

As of October, Sri Lanka’s banking sector NPL ratio stood at 4.9 percent. (NF)