ECONOMYNEXT – Sri Lanka’s banks and other financial institutions have the mechanism to lend based on cash flows without collateral, using the newly set up National Credit Guarantee Institution, Deputy Minister of Finance and Planning Harshana Suriyapperuma said.
The NCGIL set up with a 50 million US dollar loan and technical assistance from the Asian Development Bank will provide a 67 percent credit guarantee for loans given by participating lenders, reducing their risks to Small and Medium and Enterprises.
SMEs are generally considered more risky, as they may not be able to withstand economic shocks as well as better capitalized large businesses with a bigger customer base.
“There are more than one avenue and this is one of them to access credit without collateral,” he said.
“It is very interesting to understand banks will look at financing businesses by looking at the viability of the model, by looking at the cash flow of the businesses instead of just focusing on your collateral.
“It is important for banks to understand the risk profile, take note of their expectations from the shareholders and stakeholders.
“It is also important to understand the support that is required by the SME sector. That is why it is commendable the support extended by the Governor and the team at the Central Bank to facilitate the SME sector.”
Sri Lanka’s central bank had the mandates to ensure financial stability, so that banks did fail due to bad loans and also financial inclusion, where borrowers had access to capital.
The idea of a credit guarantee agency was mooted as far back as 2016, but did not get off ground due to various reasons,
Some sectors of the economy got credit easily while others did not, Central Bank Governor Nandala Weerasinghe said.
“That is because of the risk appetite, or risk taken, because the banks cannot take too much risk because they are giving money out of someone else’s money,” he said.
“They need to manage the risk when they lend money to businesses. When they see there are risky customers, they say we have to take a bit more care when they are lending.”
Banks lacked information about the creditor and they were reluctant to lend. Credit information bureaus helped in this area.
Sri Lanka had also talked about a bankruptcy law, which allowed businesses to be passed on to new owners, more easily.
“All these three reforms, I think will certainly ensure financial inclusion and more access to credit,” Governor Weerasinghe said.
For the system to work and expand financial inclusion there had to be more financial literacy and skills. The central bank was also promoting financial literacy including through regional seminars currently.
The NCGI was set up under the ADB’s Enhancing Small and Medium-Sized Enterprises Financing Project, which was approved in March 2024.
The ADB was providing 50 million dollars for the government to infuse 90 percent of the equity. The balance 10 percent came from shareholding financial institutions.
“But beyond this financing, ADB also supported the design and management model and corporate governance of NCGIL, and worked in establishing the forward-looking financial model on the sustainability of the NCGI, ADB Country Director Takafumi Kadono said.
“SMEs can access finance based on their business strength, as the Honorable Deputy Finance Minister has mentioned, and even if they do not have that sufficient collateral.
“This lack of collateral has been a significant barrier for many years for SMEs, particularly for women entrepreneurs to access financing. So ADB’s support to SMEs comes hand-in-hand with improving the banking and non-banking systems and capital markets.”
“In this process, ADB and the government work with a much larger number of banks, building their awareness on lending to SMEs, prioritizing on important economic sectors, women-led borrowers, and contributing to sustainable finance.” (Colombo/June03/2025)