ECONOMYNEXT – Sri Lankan banks have overshot lending targets under an Asian Development Bank (ADB) small business credit program to avoid penalties and falling behind competitors, prompting the lender to increasing funding and raise thresholds.
The ADB credit line is to encourage banks to target the Small and Medium Enterprise (SME) segment whose main challenge is access to finance, with the World Bank’s Enterprise Survey finding that 30% of Sri Lankan firms identified it as a major constraint.
Just 25% of Sri Lankan firms have said that they did not need a loan, the lowest among ADB developing members, according to the lender.
The ADB project specifically targets excluded segments such as SMEs that have not borrowed previously from a bank, are led by women, or are located outside of Colombo for whom high financial barriers are even more imposing.
The project used incentives and penalties to promote financial inclusion with set requirements for onlending to these underrepresented segments such as women-led SMEs and SMEs that had previously not borrowed from a bank.
In contrast to other credit lines, banks choose their own disbursement targets but incur sharp financial penalties for not achieving the targets within three months.
Banks that have not disbursed 80% of their allocation and met their financial inclusion targets within 5 months are not eligible to participate in the next semiannual allocation, effectively ceding more funding to their competition.
“This mix of incentives and disincentives has worked well,” the ADB said.
“To avoid being penalized and excluded from future funding rounds amid a restrictive monetary climate, banks have overshot their financial inclusion targets.”
Capitalizing on the results of these incentives, ADB and the government increased after the first 12 months the amount available at each funding round and raised the financial inclusion targets.
The original output of disbursing $100 million to participating banks by 2020 will be raised to $175 million.
“Despite higher targets, banks have continued to perform beyond expectation,” the ADB said, with financing to SMEs through formal intermediaries having increased.
For a bank to qualify for a subsequent funding round, 20% of the number of subloans (previously 10%) must be to first-time borrowers of a licensed commercial or specialized bank.
The target for women-led SMEs has been raised to 20% of the number of subloans from 5% previously. And 70% of the amount of subloans (previously 50%) must be lent cumulatively to the targeted SMEs.
These include SMEs that are located outside of Colombo District, borrowing for working capital that is not collateralized by fixed or financial assets, led by women, or first-time borrowers from a licensed commercial or specialized bank.
With 5 years as the average duration of an SME loan in the original project, banks can reuse the funds twice during the 10-year borrowing period.
With SMEs having contributed on average 35% equity to the subprojects, the combined effect is that ADB’s $175 million is expected to support $538 million of SME subprojects.
The SME market is large with Sri Lankan banks having disbursed $4.8 billion to SMEs in 2016.
Additionally, the market for unserved or underserved SMEs is about $2.3 billion, exceeding the assistance that government programs and development institutions’ public and private operations can provide, the ADB said.
(COLOMBO, February 09, 2018)