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Enabling Mechanisms to Facilitate Greater Access to Finance for SMEs

Ananda Silva Deputy Governor

Central Bank of Sri Lanka

Future Strategic Direction: The Big Picture for SMEs in Sri Lanka

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Present Position – Enabling Environment

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Robust Economic Growth……• The economic growth remained robust and

average growth remain around 7-8%• All sectors have contributed to growth, yet,

industry and services sectors constitute bigger share and contribute more to growth

Major Sector2012 (a) 2013 (a) 2014 (a)

Annual Q1 Q2 Q3 Q4 Annual Q1 Q2 H1(a)

Agriculture 5.2 3.4 -1.1 7.2 10.4 4.7 0.2 6.5 3.1

Industry 10.3 10.7 10.1 8.1 10.7 9.9 12.6 12.2 12.4

Services 4.6 4.3 6.6 7.9 6.5 6.4 6.5 5.8 6.1

GDP 6.3 6.1 6.8 7.9 8.2 7.3 7.6 7.8 7.7

GDP and Sectoral Growth Rates – Estimates 2012-2014

The economy is expected to grow by around 7.8% in 2014

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Continued Increase in Export EarningsExport Performance

CategoryYear-on-year

Growth (%)Cumulative

Growth (%)Jul-13(USD mn)

Jul-14(USD mn)

Jan-Jul-2013(USD mn)

Jan-Jul-2014(USD mn)

1. Industrial exports 713 798 11.9 4,667 5,349 14.6

Textiles and garments 372 414 11.3 2,373 2,827 19.1

Rubber products 68 80 17.4 465 517 11.1

Tea Products 91 99 8.5 523 620 18.6

2. Agricultural exports 143 153 7.4 828 989 19.4

Tea-bulk 45 48 8.5 297 324 9.2

Coconut 18 35 94.4 103 199 93.4

3. Mineral exports 2 3 12.3 14 48 248.0

4. Unclassified 1 1 -10.7 7 8 15.4

Total exports 859 955 11.1 5,516 6,394 15.9

Role of SMEs individually and as a part of the supply chain of large companies, plays a significant role in generating export revenue

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Growth in Tourism…..

Monthly Tourist Arrivals (2011 - 2014)

2011 2012 2013 2014

First 8 months Avg 66,475 77,601 98,656 125,205

Monthly Avg. per year 71,331 83,800 106,216

During first 8 months of 2014 tourist arrivals grew by 23.1% to 1,001,643

Earnings from tourism grew by 32.1% to US$ 1,447.2 mn during the first 8 months 0f 2014

Continuous increase in tourist arrivals creates ample opportunity to related SMEs to boom

Sri Lanka is currently well entrenched in a “virtuous cycle” and a conducive investment environment…

Low inflation

Real interest

rates

Enhanced savings

Regular pipeline of investments

Sustained growth

Low debt levels

Low fiscal deficits

Sri Lanka is currently experiencing a “virtuous” cycle

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High inflation

High interest

rates

Low investor

confidence

Sluggish investment

Low Growth

High debt

levels

High fiscal

deficit

Sri Lanka was trapped in a “vicious” cycle for more than 5 decades

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Jan

-09

Mar

-09

Jun

-09

Au

g-0

9N

ov-

09Ja

n-1

0A

pr-

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0S

ep-1

0N

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eb-1

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pr-

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l-11

Sep

-11

Dec

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Mar

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May

-12

Au

g-1

2O

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n-1

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-13

No

v-13

Jan

-14

Ap

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Jun

-14

Sep

-14

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

W.A._Yield_364 W.A._Yield_182 W.A._Yield_91

(%)

WAYR of T-bills Primary Market

1 2 3 4 5 6 7 8 9 10 115.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

13.00%

14.00%

End Dec 2012 (s) End Dec 2013 (s) End Sep 2014 (s)

End Dec 2012 (p) End Dec 2013 (p) End Sep 2014 (p)

Government Securities Primary Rates Vs. Secondary Market Rates

Downward Adjustment of Interest Rates

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Aug '11 - July '12 Aug '12 - July '13 Aug '13 - July '14 0

200,000,000,000

400,000,000,000

600,000,000,000

800,000,000,000

1,000,000,000,000

1,200,000,000,000

1,400,000,000,000

Less than 3 Yrs. 3-5 Yrs. Above 5 Yrs.

T-Bond Secondary Market Outright Transactions

Investors - Long Term Approach: Increased availability of long-term funds

In that background, Sri Lanka’s per capita income is expected to surpass US$ 4,000 by 2015, while the GDP would reach US$ 100 bn in 2016…

$981

2003

2011

2013

2015

$2,836

$3,280

$4,240(Projected)

$4,825(Projected)

2016

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GDP US$ 67.2 bnGDP US$ 59.2 bn

GDP US$

18.9 bn

GDP

$ 88.7 bn

GDP

$ 101.8 bn

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Present Position – Market Infrastructure

ProvinceBranches as

at Sep '14Population

Density as at Sep '14

Western 1,227 5,836 21.0

Southern 408 2,473 16.5

Sabaragamuwa 262 1,925 13.6

North Western 312 2,378 13.1

Central 331 2,568 12.9

Uva 186 1,265 14.7

North Central 204 1,264 16.1

Eastern 262 1,558 16.8

Northern 230 1,062 21.721.0

16.5

13.6

13.1

12.9

14.7

16.1

16.8

21.7

Banking Density (No. of branches per 100,000 persons)

Improved Access to Finance Through Expansion of Banking Network

Required to open 2 branches outside Western Province to open branch in Western Province

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SectorAmount Outstanding, Rs Bn Share of Total Loans, %Dec'13 Mar'14 Jun'14 Dec'13 Mar'14 Jun'14

Agriculture & Fishing 422.8 400.4 393.4 12.3 11.8 11.5 Manufacturing 391.1 376.1 376.6 11.4 11.0 11.0 Tourism 95.7 102.2 112.4 2.8 3.0 3.3 Transport 95.4 88.0 85.4 2.8 2.6 2.5 Construction 500.7 512.3 533.4 14.6 15.0 15.6 Traders 538.0 538.9 524.3 15.7 15.8 15.4 Services 36.5 35.9 44.1 1.1 1.1 1.3 Financial and Business Services 144.2 137.0 137.3 4.2 4.0 4.0 Infrastructure 217.4 200.9 234.5 6.3 5.9 6.9 Other Services 106.9 114.8 120.8 3.1 3.4 3.5 Consumption 877.7 897.7 850.2 25.6 26.4 24.9 TOTAL 3,426.6 3,404.2 3,412.4 100.0 100.0 100.0

Expansion Observed in Construction and Tourism Sectors Provide Opportunity for Related SMEs to Emerge

Sector-wise Credit Exposures from Licensed Banks

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Higher Portion of Corporate Loans Granted by Banks are Less than Rs. 1 mn

No. of Facilities Amounts

Although number of loans granted to SMEs are a higher portion of total number of loans, those represents a very low share of total loan portfolio

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AmountsNo. of Facilities

Corporate Loans Granted by Licensed Commercial Banks Less than Rs. 5 mn

Up to Rs, 5 mn : 85% of facilities Up to Rs, 5 mn : 14% in

value

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Agriculture and Animal Husbandry Sector

• Second Perennial Crops Development Project - Revolving Fund (SPCDP-RF)

• Tea Development Project - Revolving Fund (TDP-RF)

• “Viskam” Credit Line for Development of Commercialised Agribusiness1

• New Comprehensive Rural Credit Scheme (NCRCS)

• Commercial Scale Dairy Development Loan Scheme (CSDDLS)

Micro, Small and Medium Enterprises Sector

• Self Employment Promotion Initiative Loan Scheme (SEPI)

• Awakening North Loan Scheme – Phase II (ANLS-Ph II)

• Resumption of Economic Activities in the Eastern Province Loan Scheme – Phase II (REAEP-Ph II)

• Resumption of Economic Activities in the Eastern Province Loan Scheme – Phase III (REAEP-Ph III)

• The Prosperity Loan Scheme (“Saubagya”)

• Provincial Development Credit Scheme

• Post Tsunami Coastal Rehabilitation and Resource Management Programme (PTCRRMP)

Microfinance Sector

• Small Farmers and Landless Credit Project - Revolving Fund (SFLCP-RF)

• Poverty Alleviation Microfinance Project - Revolving Fund (PAMP-RF)

• Poverty Alleviation Microfinance Project II (PAMP II)

• Poverty Alleviation Microfinance Project II - Revolving Fund (PAMP II-RF)

• Dry Zone Livelihood Support and Partnership Programme - Revolving Fund

• Small Holder Plantation Entrepreneurship Development Programme (SPEnDP)

• National Agribusiness Development Programme (NADeP)

CBSL Contribution Towards SMEs – Lending Programmes various programmes

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CBSL Contribution Towards SMEs – Lower Risk Weight for Exposures on SMEs

25% allowance on RWA provided for banks on accommodations granted to SMEs which satisfy below criteria

The maximum exposure in the case of SME loans would be Rs.35 million at the time of first granting.

In order to qualify as an SME, the firm’s annual turnover should not be more than Rs.140 million.

The annual turnover should be based on the latest available audited financial statements at the time of granting the facilities.

If audited financial statements are not available, the draft accounts may be used. However, the audited financial statements should be obtained during the year.

The qualifying criteria is given above should be reviewed in respect of each financial year.

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Introduction of New Digitalized Fund Transfer Mechanisms

With the approval of the Central Bank, non-bank telecommunication operators also have introduced mobile phone-

based e-money systems in Sri Lanka to effect real time low value transactions.

In order to promote safety and effectiveness of mobile payments services and thereby enhance user confidence of

such services the Central Bank issued two mobile payment guidelines specifying broad principles and standards to be

followed by institutions providing mobile payment services.

I. Mobile Payment Guidelines No.1 of 2011 for the Bank-led Mobile Payment Services

II. Mobile Payment Guidelines No. 2 of 2011 for Custodian Account Based Mobile Payment Services.

The Central Bank assisted in the establishment of Common Card and Payment Switch, which is a technologically

advanced common settlement system to facilitate interbank settlements of electronic retail payment systems in Sri

Lanka. With the introduction of this common infrastructure, financial institutions will be able offer attractive

electronic retail payment products to cater to all segments in the economy.

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Penal Rate Reduction….. Banks were used to charge penal rates ranging up to 36% to 48%

p.a. worsening the financial position of borrowers facing financial distress

Considering the above CBSL had capped penal interest rate charged on all loans and advances at a maximum of 2% from 1st of August 2013

This allows some breathing space to companies in financial distress to rectify their concerns and removes the undue burdens to overdue borrowers

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Future Direction – Enabling Environment

Macro Economic Developments

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Low Inflation Stable Exchange Rate

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Macro Economic Developments Contd.….

Declining Trend in Interest Rates Declining Trend in Private Sector Credit

2020 GDP

2013 GDP

Agriculture Agriculture FishingForestry Livestock

Industry Mining and Quarrying ApparelOther manufacturingElectricity, Gas and Water Oil and gas explorationMarine and Aquatic resources Technology and innovationConstruction

Services Wholesale and Retail Trade Hotels and Restaurants Transport BankingCommunication and IT Insurance Real Estate HealthcareEntertainmentEducation servicesOwnership of Dwellings Government Services Private Services

Sri Lanka: 2020 targets a macroeconomic framework which would reflect several new drivers in the GDP computation tables…

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• Colombo – Container mega hub

• Hambantota – Free port, Service and Industrial port declared as a “Free Port”

• Galle – Leisure Port

• Trincomalee – Port-related industries and Port City

• Oluvil – Commercial and fisheries

• Kankasanthurei and Point Pedro – Regional ports

• Second international airport at Mattala

• Modernisation and the 2nd Runway at BIA

• Upgrading of domestic airports

• Colombo as a regional logistics and services hub

• IT literacy and internet access for all• Creation of knowledge-based jobs• Promotion of research and innovation• Sri Lanka as an “education” destination• Accredited foreign universities

in Sri Lanka

• Develop renewable energy sources

• Oil exploration and production – (Mannar, Cauvery, Southern waters)

• Develop oil trade related ancilliary services including gas

• Sri Lanka as a top centre in the region for commercial services

• Growth of ports and tourism will catalyse the development of Sri Lanka’s commercial sector

• Arrivals target of 4.5 mn by 2020

• Earnings from Tourism – to increase to US$ 6.0 bn by 2020

Sri Lanka: 2020 targets the continuous growth of its NEW ECONOMIC DRIVERS based on the ‘5 Hubs ++’ concept…

Sri Lanka: 2020 targets a greater bias towards export of services…

– Tourism services– IT/BPO services– Aviation services– Maritime services– Knowledge economy services

Item 2013 2016 2020

Merchandise Exports 10.4 15.9 21.4 of which Tea 1.5 2.2 2.5 Rubber 0.1 0.2 0.3 Textiles & Garments 4.5 5.6 8.0 Rubber products 0.8 1.2 1.5 Gems, Diamonds & Jewellery 0.4 1.0 1.5

Services Exports 4.7 9.3 12.3 of which Earnings from tourism 1.7 4.1 6.0 Port and Airport related services 1.0 1.5 2.0 IT/BPO services 0.6 1.0 2.0 Oil and Gas - 0.5 3.0

Workers’ remittances 6.4 8.3 10.5Foreign Direct Investment 1.4 2.8 4.3Long term loan inflows

Government 1.6 2.2 2.7Private sector 0.7 1.0 1.2

External Account Targets & Projections for 2016 and 2020 (Per Annum Value, US$ bn)

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Future Position – Market Infrastructure

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Objectives of Secured Transaction Registry

One of the difficulty in accessing finance is finding sufficient/quality collateral

This largely impacts on SMEs and woman entrepreneurs

Secured transaction Registry largely contribute to eliminate these constraints and support economic activities

STR- to Provide More Access to Finance

Initiatives to address deficiencies in the existing framework

STA and other relevant legislations will be amended with the technical support of the IFC.

Amendments to STA includes; - Broader definitions to movable properties - Mandatory registration - Precise and perfect priority rules - Enforcement mechanism for security rights - Rights and remedies of secured parties

Amendments to other legislations - Mortgage Ordinance - Trust Receipts Ordinance - Prescription Ordinance - Registration of Documents Ordinance - Finance Leasing Act - Inland Trust Receipts Act

Amendments to Existing Secured Transaction Act (STA)

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Expectation Removing barriers to a wide range of financial services to unleash private enterprise productivity and help reduce the size of the informal sector.Effective, enforceable and user-friendly registration systems.

Greater access to credit, better ratings of financial system stability, lower rates of non-performing loans, and a lower cost of credit.The end result is higher productivity and more growth.

Expectation Through Amendments to STA

Micro Finance Act

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Proposed Framework

Three-tier regulatory and supervisory framework that will be applicable to Microfinance Institutions (MFIs) in Sri Lanka which accepts deposits from the Public

Large scale MFIs in Tier I will be brought under the direct supervision and examination by the CBSL.

Small MFIs in Tier II will come under the supervision and examination of Central Bank approved audit firms who will support the Bank to take necessary enforcement of regulatory action in respect of those MFIs.

Tier III MFIs falling under the Commissioner of Cooperative Development, Registrar of Cooperative Societies, Divineguma Department and Board of Management of Divineguma Community Based Bank and Banking Societies and the Commissioner of Agrarian Development will be exempted from the Central Bank regulation and will come under the regulation and supervision of the authorities already empowered under the Statutes.

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Further measures to expand availability of funds and utilization

Two investments banks to raise over 10 year tenure long term foreign development finance up to US$ 250 Mn each to provide long term funding for SMEs

Government to underwrite the exchange rate risk

Exemption from income taxes for interest income earned on such lending

Setting up SME Centres

• As the economy becomes broad-based and diversified, so should SMEs• Financial institutions need to look beyond traditional

business activities and broaden the availability of types of facilities• Creation of funds to support new ventures to facilitate financial difficulties faced

by emerging SMEs• Banks and finance companies to support resolution and revival of SMEs

• Private equity funds looking for investments opportunities to consider SMEs with potential• Separate SME board at CSE to allow SMEs to be listed to enhance

transparency

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Way Forward…..