Asking banks to bend rules to pump more money into SMEs

The central banks and governments around the world—be they from the developed world or developing world— aspire to do one thing in common, i.e. to practise prudent monetary policy free from political interference, which in return ensures a stable financial sector. 
 
But in Sri Lanka, more often than not, the Central Bank has succumbed to political pressure and sometimes has gone to great lengths to appease the whims and fancies of the politicians in power.

Sri Lanka’s Central Bank unfortunately again did one such act last week. 

In a circular issued last Friday, after every banker went home surviving a terror-stricken, gloomy work week, paralysed by the Easter Sunday terrorist attacks, the Central Bank asked all licensed banks to not to provide for those small and medium enterprise (SME) loans, which continuously delay repayment. 

According to the circular, the banks can now stay from transferring an SME facility up to Rs.25 million, which is already in payment due for the past 30 days, to the next bucket, which is the 60 days payment due bucket, which raises the provisions under IFRS 09.

The circular also stated the arrangement is for a temporary period from January 1, 2019 to June 30, 2020. 

IFRS 09 is more brutal than its predecessor on the provisions made against possible bad loans and it hinders, among other things, the banking sector bottom line, due to higher provisions. 

But how come a central bank, which was relentless on the implementation of the new accounting standard and other international requirements meant for banks to the letter, could soft-peddle on selective areas?

The Central Bank has been so firm on taking the domestic banking sector in lockstep with the International Financial Reporting Standards and other international developments. But here they backtrack. 

First, what are the chances of a facility not serviced in its first 30 days since falling into due being serviced in the next 30 days?  

Second, what’s the rationale behind the time frame? Is it because the legitimate life of the current regime comes to an end in August 2020? It is anybody’s guess.  

The banks will be happy that they don’t have to provide more but less, which would allow them to temporarily jack up their earnings. But how could a central bank, which has a broader responsibility towards maintaining a stable financial system, give into the demands of those in power with myopic visions?

How could someone in his right senses put his rubber stamp to relax lending and ease the need for prudency-based provisions against possible bad loans, when the banks are already suffering from thumping levels of non-performing loans?       

 
There is absolutely no question that things will return to normalcy from the current crisis situation in the next couple of months. After all, Sri Lanka suffered a 30-year war and we have bounced back. 

But the question is what renaissance in SMEs the authorities are expecting by pumping more money into them, as Sri Lanka’s SME sector has gone into hibernation due to a comedy of policy errors by those in power.

Everybody at the policymaking level appears to be holding a common fallacy that the SMEs don’t borrow because of the higher rates prevailing in the market. But it is the lack of confidence in the market than the rates that keeps the SMEs dormant. 

Higher rates could be a factor but not the only factor that prevents the businesses from making the new investments.

The banks are not at fault for higher interest rates as they were the result of the government’s and Central Bank’s own doing by running an extremely relaxed monetary policy post-2015 election, when the economy was not equipped to do so, just to appease the electorate.   

Today, the SMEs need more certainty and assurance from those at the decision-making positions on prudent monetary policy and long-term economic policy sans frequent sidestepping but not cheap money. 

On the other hand, banks need the assurance of continuity of a level playing field, where they can set their pricing based on their balance sheet mix and the market they want to operate in and not to be told how to run a bank by those in power. 

And the customers need a safe society and a country free from terrorism and extremism, where all three groups can have hopes of a tomorrow, which is the job of any responsible government.

The Central Bank, after few weeks of powwow with the government and banking sector, last week sent multiple circulars to the banks, of which few capping the maximum rates offered by the banks on deposits and others easing the rules on the provisions made against the possible bad loans relating to SMEs, so that the banks could provide more loans to the SMEs.