May, 16, 2019
Sri Lanka’s economy is not growing as fast as it potential would suggest. The final data on the country’s economic performance has not yet been collated, all forecasts point to a GDP growth rate of approximately 3.6% in 2018. While this is a definite improvement over the 3.1% growth rate witnessed in 2017 – the lowest since 2003 – it is clear that the nation has many obstacles to clear before economic growth can truly take off.
In examining the health of our economy, another area that requires greater attention is with respect to Non-Performing Loans in the banking sector. While the data is still coming it is undisputable that over the past year, tighter economic conditions have driven up NPLs across the board.
More than just a tough year
While still within manageable parameters the spike in SME NPLs speaks to fundamental issues within the sector as much as it points to a challenging macroeconomic backdrop. The fact of the matter is that our SMEs are for the most part – completely focused on domestic markets. While this is a sector that already provides massive amounts of employment to the national economy, the quality of this employment will always remain a volatile question for as long as Sri Lankan SMEs avoid integration with global value chains.
When we look at the performance of some of our South Asian peers, we begin to see a vision of our true potential and it is clear that it is a vision that is built on the promotion and development of Small and Medium Enterprises (SME). Such businesses have the capacity to generate broad-based economic growth however in Sri Lanka and across the Asian region, SMEs tend to grapple with similar challenges – lack of access to finance, business opportunity and market exposure.
In order to make financial systems more accessible and inclusive at this grassroots level, policy makers have prioritized measures to cut red tape and streamline business registration while focusing on productivity enhancement and improving access to finance.
Regionally such measures have had many notable successes, and even locally, we have seen highly commendable state-led initiatives like Enterprise Sri Lanka that have rightfully placed a priority on SME development. Pairing donor assistance from sources like the Asian Development Bank with government oversight and private sector engagement, Sri Lankan banks provided loans to over 1,750 MSMEs at retail market interest rates in 2018, with over a quarter of this capital being channeled towards women-led SMEs.
Unfortunately, they face many obstacles in access to finance and as a result resorting to borrowings at very high cost especially through informal sector as they cannot provide tangible security to arrange formal lending.
While access to finance remains a serious challenge, especially for SMEs that are just finding their feet, the ultimate test of the sector in our experience has not been access to finance, but rather, access to the technical knowledge necessary to up-scale a business. Globally SMEs are going back to the basics, and it is past time that our sector follow suit. This is crucial given that we see SMEs as playing a particularly vital role in terms of promoting regional economic development, especially outside of Colombo and the Western Province. In order to assist them in their endeavours, as a responsible Bank, very soon we intend to introduce a product exclusively designed for this category of businessmen operating Island- wide. I believe this is the need of the hour for the Country as well as the Govt.
The ideal time to experiment
Worldwide, customers are demanding more ethical and sustainable products and services. In order to truly expand, our SMEs have to be groomed to compete in global markets and capture these opportunities. This means a greater priority not only on growing market share, but balancing revenue growth with efficiency improvements and leveraging unique attributes of agility, innovation and strong customer relationships.
This presents an unprecedented opportunity for Sri Lankan SMEs. As the global economy becomes increasingly interconnected, new niches in the global value chain are being carved out by Asian SMEs and we are confident that there is a place for Sri Lankan SMEs to be woven into the increasingly rich tapestry of Asian economies. Over the recent past, the sector has seen the emergence of new players that break the mold. From tech and fin—tech startups to restaurants, and even professional services, the traditional concept of SMEs is changing, and with it, the traditional limitations.
However, building a business to the scale necessary to integrate with global value chains is a complex challenge. Many SMEs tend to struggle with basics like financial management while others are small family run businesses that aren’t willing to take further innovations. They become comfortable, and this places a cap on their growth because they don’t want to surrender control of their business to bring in the right people to take it further. This cap in the lifecycle of many SMEs is the true challenge of our times. Those who overcome it have the most to gain.
Value beyond funding
The challenge of achieving scale is not simply a question of how much capital can be funneled into the SME sector. Instead, all stakeholders must collaborate to provide holistic support to SMEs. In our experience, the only way to consistently help SMEs to add value, is for the banks that support them to lead the way. With HNB, we have not only worked to promote our SME Loans, but to also package these loans and value-added services spanning advisory services, export promotion, cashless payments, insurance and even analytics and Enterprise Resource Planning.
Working in close collaboration with the Export Development Board of Sri Lanka (EDB), we launched the HNB SME Export Credit, a pioneering new facility specially designed to meet the requirements and
aspirations of Sri Lanka’s burgeoning Small and Medium Enterprise (SME) sector. In this manner we aim to foster unprecedented new opportunities for export-oriented growth in the SME sector. This is an entirely unprecedented development in the domestic market and is part of a broader effort from HNB to support macroeconomic growth in Sri Lanka.
During 2018, 100 new exporters were brought on board under the SME Expo credit scheme and to date, we have released approximately Rs.1 billion in credit to the SME Export sector across the island – with a primary focus on supporting development of Apparel, Food & Spices and coir industries while a greater emphasis is also planned for upcoming industries leveraging digitally enabled products as well.
Based on the projected economic growth for Sri Lanka and the National Export strategy in 2018-2022 , we expect SME and the Export sectors to be key growth sectors for 2019 and strongly believe that strong brand name and new technology led services will add further value to grow our export business under SME in future.
More recently, HNB also launched a new SME bundled product that enables any client who opens a current or savings SME account and maintains a minimum balance to gain access to special discounts on pricing, waiver of professional and documentation charges and even access to HNB’s SME Business card.
Such innovations have been complemented with the building of a new digital platform that will enable SME clients to download a loan application form and submit it directly to HNB online, drastically streamlining the process while digitally expanding SME access to finance to every corner of the island.
HNB’s own investments into automation have enabled its branch teams to focus entirely on building relationships with SME customers. By regularly engaging directly with customers, our officers are able to understand where each customers’ pain points are, and support them with flexible repayment terms and advise at every turn.
Another crucial innovation for SME customers has been in terms of providing education in financial literacy through an island-wide training campaign. Here too, it is not just providing knowledge, but follow-up that is crucial to ensuring that SMEs retain the skills and information, over time enabling them to expand in a sustainable manner.
Moving forward, we have extremely bold plans to condense these strategies into a comprehensive, structured programme for SME education and empowerment, potentially partnering with local and international educational institutions in order to translate academic best practices into practical business measures.
Certainly the Sri Lankan economy has faced tough times and the year ahead is full of challenge, however, necessity is the mother of innovation, and today, it is more necessary than ever for Sri Lankan SMEs to be bold, and compete on an international stage. With the proper guidance and assistance, we believe that the emergence of a new generation of Sri Lankan SMEs is not only possible, but inevitable.
By HNB DGM- SME & Midmarket, Jude Fernando