Sri Lanka banks not taking enough risks; should finance startups: CB Governor
ECONOMYNEXT – Sri Lanka’s new Central Bank Governor W D Lakshman said banks should drop a ‘risk averse’ mindset and finance startups, and a development bank was needed.
Following a spike in bad loans in the wake of Sri Lanka’s latest currency collapse, the government has asked banks to give a debt moratorium to small and medium-sized industries.
“In this context, I urge Sri Lanka’s banking sector to rethink its credit disbursement policies, as the traditional ‘risk averse’ mindset has deprived emerging entrepreneurs and new ventures of much needed initial capital,” Central Bank Governor W D Lakshman said.
“Credit schemes that take into consideration the specific challenges faced by startups have failed to develop.”
In countries such as the US, high risk start ups are financed by high net worth investors who can take on high risks.
“The absence of dedicated development finance institutions is felt strongly, particularly at a time when the SMEs require support from the banking sector for survival during the phase of economic downturn as well as during the period of their takeoff,” Governor Lakshman said.
His comments came as the Monetary Policy Roadmap said licensed specialized banks (typically saving and development banks) would cease to exist and all banks would be lumped together into licensed commercial banks.
Sri Lanka built two development banks in 1955 on the World Bank’s behest when ‘development economics’ was taking off after World War II and later after the economy was re-opened in 1978.
Development banks received foreign currency loans as capital, and the Sri Lankan government bore the exchange risk.
As nominal interest rates and inflation soared amid steep depreciation in the early 1980s, subsidized credit was given through the two banks and other small and medium enterprise credit schemes.
Due to monetary instability and see sawing interest rates many banks were unwilling to lend long term and there was also no long term yield curve to borrow domestically.
There was no domestic risk free yield curve because there was no market driven liquid government securities market and long term rupee securities were issued at price controlled rates to so-called ‘captive’ sources who were forced to buy them.
Any bank that lent loan term would have to run maturity mismatches which would go against the lender when policy corrections were made to arrest the collapse of a soft-peg.
A decade ago another two development banks, Lankaputhra and SME Bank was built. They were hit with very high bad loans and were merged and bailed out with tax-payer funds. (Colombo/Jan06/2020)