Complementary Financing Assistance Package for SMEs
By W.C. Dheerasekera
The Central Bank of Sri Lanka (CBSL) recently offered financial assistance packages to domestic businesses as redress for adverse effects of the COVID-19 pandemic on the traditional approach of harnessing debt market instruments subject to the provision of collateral.
Under the new refinancing scheme, CBSL will provide funds at a concessionary rate of one per cent against the pledge of a broad spectrum of collateral on the conditions that Licensed Commercial Banks (LCBs) will in turn lend to domestic businesses at four per cent. Although the cost of loan capital is reduced, domestic businesses have to provide collateral to have access to loans offered by LCBs.
When Domestic Businesses (DBs) failed to pay loan instalments, LCBs without providing technical assistance to address the factors caused for delayed payment, utilise the Debt Recovery Act No. 2 of 1990 to seize assets offered as collateral.
Considering the predicament of DBs including Small and Medium Enterprises (SMEs) on their exclusive dependence on collateral based debt financing means for development of their enterprises, a proposal was made by JICA in their Master Plan for Industrialisation and Investment Promotion in Sri Lanka (July 2000), to establish an effective system of credit guarantee to SMEs to seek redress from the burden of the Debt Recovery Act.
CGF principles not to make it a waste disposal of bad loans
The development of a modern credit guarantee system in Japan is the trial and error, over 50 years. The lessons learned by Japan is larger the number of guarantees given to SMEs lesser the burden of risks. Accordingly, the Japan International Cooperation Agency (JICA) team recommended a Credit Guarantee Fund (CGF) based, on five principles not to make it a system of ‘waste disposal bad loans’.
The principles are CGF should:
1.Be a public institute covering the whole country.
2.Specialise knowledge and skills to research and examine the credit worthiness of SMEs.
3.Be open to all SMEs and financial institutions.
4.Maintain guarantee multiplying ratio of 50 times.
5.Maintain the capability of human resources of dedicated and professional guarantors who are neither sub-agents of Financial Institutions nor staff of Governmental Agencies.
The recommendations of the JICA Master Plan inclusive of the recommendation were submitted to the Government of Sri Lanka (GOSL) in 2002 and with the change of Government in 2004, the implementation of the recommendations of the JICA Master Plan was abandoned.
Subsequently, there was a series initiative to establish CGF as described in my article: Whither Credit Guarantee Fund published Ceylon Today on 3 April, 2019.
National Enterprise Development Authority (NEDA) developed a proposal for Credit Scoring and Guarantee Bureau (CSGB) to facilitate SMEs to access loan capital and it was submitted to the Line Ministry by NEDA with a draft Cabinet Memo in 2014.Whilst the Line Ministry evaluated the proposal, the Government was changed in 2015.
The Yahapalana Government proposed to establish CGF in their first three budgets, but no action was taken to establish CGF.
Credit Guarantee Systems are operating in Indonesia, Malaysia, Nepal, the Philippines, Thailand, Taiwan, Korea, Japan, Vietnam (Asian Countries), Germany, Austria, Switzerland, France, Italy, Great Britain, the Netherlands, Spain, Belgium (European Countries), the United Sates of America, Canada (North American Countries) for some time.
In 2008, China also set up a Credit Guarantee Fund (60bn Yuan= US$ 9.6bn) to help channel more bank loans to cash strapped small firms and farmers. This CGF will encourage banks to make more loans to small firms and start-ups with limited collateral.
Although CGF has been the driving force for development of SMEs in other countries, no action has been taken yet to establish CGF in Sri Lanka.
Since CGF is a complementary financing tool for debt market instruments such as loans early action has to be taken to establish CGF by NEDA to implement the Refinancing Facility offered to LCBs to address financial problems faced by SMEs by CBSL more effectively.
It is observed that said Refinancing Facility offered to LCBs by CBSL for loans given to LBs (including SMEs) are not addressing the needs of enterprises to commercialise innovative products and processes. Those needs are usually addressed by offering venture capital funds.
TDF to commercialise innovations
We have seen a series of innovative products and processes were developed in Sri Lanka to address the needs of people during the COVID-19 Pandemic. The Automated Guided Vehicle (AGV) Robot to aid medical personnel in the battle against COVID-19 developed by Atlas Engineering Tech Team and the Convent Dry Bag Masks Ventilator developed by Dr. Jeewaka Dayaratne and two medical engineers Sajith and Udana are such innovative products.
LCBs are not offering venture capital funds to commercialise such innovations. Provisions are made in the Act of Incorporation of The National Enterprise Development Authority (NEDA) to set up the Technology Development Fund (TDF) to address the need for commercialising such innovations. NEDA initiated a dialogue with the Malaysian Technology Development Fund (MTDC) with the objective of developing TDF based on the best practices of MTDC.
Please see my article: Motivating Technologists and Empowering Entrepreneurs published in Ceylon Today on 15 May 2019.
The MTDC was established in 1992 as a Malaysian Government-owned Corporation and became the country’s leading agent of commercialisation of R&D results using venture capital funds. After the successful commercialisation of R&D results, MTDC now operates as a public quoted company.
Explaining the role of MTDC
A Conference was held on 21 September 2012 at NEDA with a delegation of MTDC to familiarise with the operations of MTDC. The delegation explained the roles of MTDC as identifying, financing and developing potential companies in strategic technology areas and focusing on commercialisation of R&D results.
MTDC offered its services through five wings. The first wing is the Commercialisation of R&D Fund (CRDF) for commercialisation of technologies developed by public R&D institutions or output of in-house R&D activities of private companies in Malaysia.
After their visit MTDC sent a proposal for a two pronged study on research, development and commercialisation process with a three-phase approach as a feasibility study to NEDA to facilitate institutionalise of TDF. MTDC wanted NEDA to pay US$231,500 for the feasibility study. NEDA could not mobilise funds for the feasibility study.
Since, TDF is developed based on a MTDC model, funds for the proposed feasibility study and the seed capital for TDF have to be mobilised from equity market development sources. Hence it is suggested that NEDA and MTDC jointly explore the possibility of using funds from the Silk Route Fund introduced by China as an equity financing mechanism.
Accordingly, NEDA has to take early action to establish CGF and TDF as complementary financing mechanisms to CBSL’ Refinancing Facility offered to LCBs to provide loan capital to SMEs more effectively to operateand expand their enterprises and to provide equity financing for those SMEs expect to develop new enterprises by commercialising innovative products and services
These two funds will facilitate improving cost competitiveness of SMEs and enhance quality competitiveness respectively by ensuring access to loan capital and by providing equity financing capital and thereby improving Sri Lanka’s Ranking in the Global Competitiveness.
(The writer is an Industry Strategist & Development Specialist and Ex-Secretary Ministry of Industrial Development)
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