Micro, SME lending must increase for equitable growth
Tight fisted banks must stop guzzling govt. securities, top banker says


Moots legislation to redeploy deposits in North and East, not sent to Colombo

by Devan Daniel

With low interest rates and a recent policy rate cut, the country’s commercial banks are still cautious in their lending, preferring to invest excessive rupee holdings in government securities, but a top banker says this must change with more lending directed to rural entrepreneurs and small and medium enterprises, as they would drive the country’s economy forward, until large, long term investments come in, more so for the North and East.

HNB Managing Director and President Bankers’ Association Rajendra Theagarajah said Sri Lanka’s banks were investing too heavily in government securities while being trapped in a collateral security based lending system.



"Banks are either in flight to quality mode or are too tight fisted. The challenge now is to unclench the tight fists because too many of them are enjoying investing in 100 percent risk free instruments," he said addressing an investor forum organised by CT Smith Stockbrokers last evening.

He said if Sri Lanka’s per capita income was to double in five years in line with the government’s vision, and if incomes were to be equally distributed, banks would have to lend to smaller players in the economy.

"We believe the economy would be driven by the small and medium sector and at the moment, the country’s commercial banks have neglected this sector. While waiting for the large long-term investments to come in, helping this sector would actually provide the base on which FDIs could grow," he said.

Foreign Direct Investments have dropped during the first six months of this year as against the corresponding period of last year.

Bank loans to the private sector have grown at 6.2 percent while loans to the government and public corporations have increased by 19 percent and 119 percent respectively.

The Central Bank earlier this year said loans to the private sector must double from current levels if the per capita income was to double and urged the government to curb reckless spending and tap into external sources to bridge high deficits.

In recent months, the banking sector has been holding on to excessive rupee levels, averaging Rs. 30 billion each day for the past three months according to dealers.

These funds have been used to invest in government securities and bonds, which saw rates come down to below 9 percent for Treasury bills. Commercial Bank dealers said the Central Bank may have to cut policy rates further in order to kick start bank lending to the private sector.

Theagarajah said banks were also trapped in a collateral security based lending model which prevented them from lending to SME sector and micro entrepreneurs and there was a need to shift to cash flow based lending.

"If a man has a single cow, he cannot purchase another which could increase his income because he has no collateral to place as security when borrowing from a bank."

While, decrying the lack of bank support to the micro and SME sectors of the economy, Theagrajah cautioned that banks should not rush into it.

"You cannot service this sector from Colombo and you cannot approach them with cufflinks and tie. You should understand the sector," he said, adding that HNB, which has three percent of its total loans in this sector, recruited agriculture graduates to managerial levels so that they would understand the agriculture sector much better.


"With one thirds of the land area and two thirds of the coastal area opening up after the war, agriculture and fisheries are two sectors that can grow and banks would have to understand these sectors if they are to lend effectively," he said.

Meanwhile, Theagarajah said commercial banks should make a voluntary commitment to utilise funds collected in the North and East in those areas.

"There has been a surge to open branches in the North and East. But the idea is not to open shop and mop up all the deposits to be brought to Colombo. There has to be commitment or legislation to ensure that a certain percentage of the deposits are redeployed in those areas. If this does not happen there would not be equitable growth," he said.

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