Comment - Merging SME and Lanka Puthra banks

According to Finance Ministry sources, the Government is planning to merge the SME Bank withthe Lanka Puthra Development Bank. The merger as well as the setting up of the Lanka Puthra Bank itself is a question that the top Treasury and Central Bank officials should answer. The two banks were set up by the UPFA government to help the SME sector of the country.

In 2004 the Rata Perata policy statement of the UPFA government gave top priority for the SME sector and the agriculture sector of the country. To implement its policies the SME bank was established in 2005, following the recommendations by an SME focused Cluster of the National Council for Economic Development (NCED).

The committee comprised private and public sector SME representatives with multi-disciplinary skills. The Committee reviewed past and current SME stakeholder submissions in a comprehensive study undertaken in late 2004.

The same officials who established the SME Bank advocated setting up another Bank for the same purpose in President Mahinda Rajapaksa's policy statement. After the election the bank was set up and according to sources, the bank has not performed exceptionally well to support the objectives of the bank.

If the private sector or a second player entered the SME sector financing, no doubt it will create competition and deliver some benefits to the sector. The purpose of setting up the second bank with Treasury money was not clear. If the government wanted to channel more funds to the sector it could have been done through the SME Bank.

If the SME Bank was not performing well this decision would have had some meaning but according to reports the SME Bank is doing its job well.

According to the latest financial statements released by the Bank, as at June 30, 2007, the total loan disbursements in the small and medium enterprise sector stand at Rs. 500m.

The bank recorded a profit of Rs. 18m in the first half of 2007 compared to Rs. 3m in the corresponding period of 2006. During the first half of 2007, the bank granted loan facilities amounting to Rs. 125m.

The Bank is undertaking two major loan schemes this year. One is the Loan scheme for Second Generation Mahaweli Settlers in collaboration with the Ministry of Mahaweli Development. The other scheme is to provide finances to build storage barns for big onion cultivators in the Matale district.

The SME Bank has taken steps to assist the pioneering industry such as BPOSs and inventors who need assistance on "special" terms and conditions.

If the Lanka Puthra Bank is performing well there would not be a need to merge it with the SME Bank. But if Lanka Puthra is in a crisis the merger would put the SME Bank too into a crisis and finally the most timely and prudent policies of the government with regard to the development of the SME sector will suffer.

According to SME Bank sources, the Ministry of Finance has already given instructions to the SME Bank to stop all new lending. Consequently, a large number of small and medium enterprises including members of the Federation of the Chamber of Commerce in Sri Lanka are in a dilemma.

A special bank to help small businesses, farmers, fishers and small industrialists was a long-felt need. There are a number of commercial banks in the country - private and public which are competing aggressively to collect the savings from these average people.

However, all those banks exclude those people from their lending schemes through various restrictions. Finally those banks channel these funds of the rural folk to the corporate private sector in Colombo at very low cost.

The collateral-depended lending of the banking sector was the main problem faced by SME enterprises. The current practice of commercial banks and other banks demanding 150% of the value of the loans to be secured with a mortgaged asset has severely restricted the borrowing capacity of small entrepreneurs. The banks compete only for secure lending such as housing loans and leasing and not for the investment needs of the SME sector.

The objectives of setting up rural development banks too were the same but they have not become facilitators of the rural economy. Today the interest rates of these rural development banks are far higher than the market rates. However, they are close to the people and exploit the rural folk by charging higher rates.

According to figures the SME Bank has proved its success in catering to the needs of the target economic segment and the directed lending program of the Bank has reached the upper and middle segments of the SME community.

Meanwhile, unconfirmed reports on the Lanka Puthra Bank said that the bank had acted on a different business line and not focused on its main objectives. One report said that the bank has lent huge sums of money to a businessman at unbelievably low rates. If the merger affects the SME Bank this merger should not take place.

The SME sector is a significant part of the country's economy and by ignoring it, the government will not achieve the growth targets or other desired long term economic objectives. It would neither serve the hopes and aspirations of those who brought the government into power.

The SME sector is extremely important for rural development and to reduce the wide regional differences in economic development. The small and medium enterprises have a greater capacity to utilise local resources and absorb unskilled and semi-skilled labour.

The SME sector needs a Bank that feels the pulse of these entrepreneurs. Small entrepreneurs are not less creditworthy and they are the engine of growth of emerging economies such as Sri Lanka.