ADB-backed initiative to improve Lankan SMEs’ access to bank loans

• Govt. to operationalise National Credit Guarantee Institution as PPP
• Seeks US $ 100mn from ADB as initial capital
• 10 banks and 3 NBFIs have joined by committing
• US $ 10mn
• SMEs account for 52% of SL’s GDP while employing 45% of workforce

By Nishel Fernando 

In a bid to support the country’s small and medium-sized enterprises’ (SMEs) access to commercial loans, the government is moving towards operationalising the Asian Development Bank (ADB)-backed National Credit Guarantee Institution (NCGI) initiative as a public-private partnership (PPP), with an initial capital infusion of around US $ 110 million.
As the initial step, the Finance Ministry recently established the NCGI.
As the next step, the government and participating financial institutions are set to infuse US $ 100 million and US $ 10 million in capital, to commence the operations of the NCGI, according to Finance Ministry Development Finance Department Additional Director General P.M.K. Hettiarachchi.
“Once the NCGI comes into operation, the SMEs and start-ups will be able to borrow from these financial institutions based on the guarantee provided by the NCGI, without collateral,” he said.
Hettiarachchi noted that the government expects to fund the required US $ 100 million through the ADB, to operationalise the NCGI. Ten banks and three non-banking financial institutions (NBFIs) have joined the initiative by committing to capital
infusion requirements.
As the banks and NBFIs consider SMEs to be of high credit risks and lending continues to be largely based on collateral, rather than cash flows, the SMEs remain crowded out from the financial sector by larger corporates. 
According to the IFC estimates, Sri Lanka has the highest share of SMEs that are either fully or partially
credit constrained. 

The NCGI is expected to build the financial institutions’ capacity for cash flow-based credit appraisals, which will lead to more cash flow-based lending over the time.
Responding to a request from the government in 2016, the ADB initiated a capacity development technical assistance committee and proposed a project to set up the NCGI in 2017. 
Hettiarachchi noted that the government is now in formal discussions with the ADB to secure the funds.
The SMEs account for 52 percent of the country’s gross domestic product (GDP) while employing 45 percent of 
the workforce.