Central bank chief Monday (06) urged banks to rethink their credit disbursement policies, as the traditional ‘risk averse’ mindset has deprived emerging entrepreneurs and new ventures of much needed initial capital.

“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,” said Central Bank Governor Prof. W.D. Lakshman whilst delivering the Central Bank roadmap for 2020.

Prof. Lakshman further noted that credit schemes that take into consideration the specific challenges faced by startups have failed to develop.

“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,” he added.

Governor recalled that the Central Bank took a tight monetary policy stance until 2018 in view of high rates of credit and monetary expansion and adverse balance of payments pressures at the time. It now maintains an accommodative monetary policy stance in view of subdued economic growth, muted inflationary pressures and rapidly decelerating private sector credit amidst high nominal and real market interest rates.

The Central Bank reduced the Statutory Reserve Ratio (SRR) applicable to all rupee deposit liabilities of commercial banks by a total of 2.50 percentage points in November 2018 and in March 2019. The objective was to provide adequate levels of liquidity to the domestic money market. Helped also by global developments, the Central Bank reduced policy interest rates by a total of 100 basis points in two steps, first in May and then in August 2019.

“In spite of monetary policy easing, market interest rates remained high in both nominal and real terms. Private sector credit growth decelerated sharply, particularly during the first half of 2019. This prompted the Central Bank to take regulatory actions of imposing caps on deposit interest rates of financial institutions. This was done in April 2019, with a view to addressing the issue of weak transmission of monetary policy measures,” he said.

With deposit interest rates and cost of funds declining, the Central Bank removed the caps on deposit interest rates of licensed banks and imposed caps on lending rates in September 2019.

“The intention was to induce a sizeable reduction in lending rates, thereby increasing credit flows to support the revival of economic growth. As a result, most market interest rates declined, notably during the second half of 2019,” he added.

The Governor further noted that going forward the Central Bank expects to review the caps on lending rates, once the financial institutions meet the stipulated reduction in lending rates and credit flows normalise during the year.

“In an environment of monetary and fiscal stimulus, measures are to be implemented in the near future to enhance credit flows to small and medium scale enterprises (SMEs). These measures are expected to accelerate credit growth to the private sector in 2020 and beyond, and enable a speedy revival of economic activity,” he said.

A relief package for reviving SMEs is being designed, particularly targeting non performing advances. For those who seek relief under this package, suspension of legal action and rescheduling of loans along with some interest rate concession have been proposed.

The revival of businesses of such borrowers is expected to be facilitated through a grace period for capital repayments and a short-term working capital loan. For borrowers in the performing category, a new facility with extended repayment periods including a grace period for capital repayments under reasonable interest rates is being considered.