Regional fora a must for rural development

The Chairman of the Business for Peace Alliance, Suresh D. De Mel, says there should be regional forums for government, banks and businesses to discuss and find solutions for various issues affecting rural economies.

"Many businesses in the rural economy, especially the SME sector, have no clue about various concessional loans that government and multilateral organizations such the ADB offer through private commercial banks," De Mel told the Island Financial Review.

"There is very little they can understand from reading newspapers therefore they miss out on some of the concessional credit schemes. Regional forums will go a long way in not only addressing this issue but also create better understanding between local government, banks and the businesses," he said.

Credit crunch…

The rural economy has always had problems with regard to borrowing capacity and finding affordable credit. But now things have gotten worse.

An official of a commercial bank based in the South said it is three times harder for rural businesses to borrow.

"Banks are being very cautious in their lending and are making it tougher for businesses in rural areas to borrow as a result of the prevailing economic conditions brought about in part by the global economic crisis," the banker said.

With export earnings contracting, this puts more pressure on SMEs’ capacity to borrow, and analysts say the attitude of banks could make things worse.

Earlier this month President Rajapaksa, asked the Central Bank to investigate in to commercial banks making profits while the SME sector struggled to survive.

However, commercial banks are highly taxed and therefore find it difficult to attract investors to be able to build their capital base in order to expand their lending portfolios. "In 2009 and 2010 banks will not be able to lend even if they wanted to as they find it difficult to raise new capital because they continue to make poor returns on equity. They will not be able to lend even if interest rates come down," Nihal S. Welikala, Senior Advisor to NDB Bank, told a seminar last year.

Being the most taxed sector, with almost 60 to 65 percent of the profits taxed, banks have long said that it was difficult to raise new capital because investors received poor returns.

Banks face a dilemma as to whether they should pay their investors a reasonable dividend or plough back profits for expansion and excursions into the rural areas of the country.

"If banks are to expand and grow, capital build-up is prerequisite. Investors must be attracted in order to do this, however banks are not making enough returns and are facing a dilemma," Manoj Akmeemena, Senior Manager, Strategic Planning, Sampath Bank PLC said.

However, De Mel said the rural economy reacting to the global economic development is slow.

"Many people in the rural economy do not depend on the banking sector for their credit needs, it is only businesses that are facing difficulties in obtaining a loan," he said.

This, together with the low dependence of bank credit that the agriculture and fisheries sectors seem to have, the rural economy is not feeling the full impact of the credit crunch.

"The rural economy is not facing a crisis as such, but the affects of the global crisis’ impact on Sri Lanka is bound to affect the rural economy sooner or later," he said.


De Mel said the tourism sector in the South, particularly the SMEs, are facing a tough time repaying their debts that were taken to rebuild their establishments that had been destroyed by the tsunami.

"With the slump in tourist arrivals their revenues have fallen and with that their ability to repay loans. Many are finding it difficult to access the concessionary loans provided by the government and the ADB. Understandably, commercial banks are not too happy lending to them because the risks are too high," he said.

De Mel called for a positive solution to the plight faced by the tourism sector in the South.

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