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