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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » SMIs struggle with high interest rates

SMIs struggle with high interest rates

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1SMIs struggle with high interest rates Empty SMIs struggle with high interest rates Wed Oct 03, 2012 12:13 am

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Small and medium industries (SMIs), already struggling to gain access to bank credit facilities, are hit by high interest rates.

In a brief interview with The Island Financial Review Sri Lanka Chamber of Small and Medium Industries President Aloy Jayawardene said high interest rates were taking their toll on businesses while the chamber continues to lobby for assistance from the government.

"Access to credit is a problem we have highlighted for years but sadly authorities have done little. We have already sent out letters stating our concerns to the relevant authorities hoping that the upcoming budget would have some relief," Jayawardene said.

For some time now, a constant grievance of the chamber has been poor accessibility of bank credit for small and medium industries, which represent around 70 percent of the country’s industrial sector. Last November too, Jayawardene shared these concerns at the chamber’s 48th anniversary celebrations.

The Treasury’s 2011 annual report highlighted how the country’s banking sector was probably not doing enough. But this year, the economy is going through a painful correction and interest rates have risen, making things harder for SMIs.

"Despite the country’s banking and financial institutions having expanded rapidly with an extended branch network, the availability of credit to agriculture, plantations and a wide range of small and medium enterprises remain unsatisfactory," the Treasury said of 2011.

"The allocation of resources by banking and financial institutions often seems to have favoured financing the importation of commodities and motor vehicles. Lending to value added real economic activities have been constrained by the conventional approach to banking and collateral based lending. The project financing approach has not received adequate attention by these agencies by way of promoting new financial instruments.

"In the context of the possibilities of replacing imports of a wide range of products in the interest of the national economy, the country’s banking sector has a special responsibility to divert enhanced resources, while professional development and investment bankers should promote investment in the real economy in place of imports," the Treasury said.

End September 2011, the average weighted prime lending rate of commercial banks stood at 9.32 percent. This year the rate has increased to 14.15 percent.

"Prime lending rates apply to high net worth individuals and companies, with ordinary citizens and small and medium enterprises having to pay higher rates of interest on their loans, provided they are lucky enough to get a loan," one currency dealer said.

The Central Bank twice this year tightened policy interest rates and also slapped a credit ceiling after high credit growth in 2011 was allowed to erode the country’s balance of payments with interest rates and exchange rate held constant.

Of the new loans created in 2011, the domestic banking sector had approved 1 percent to the agriculture sector, 3 percent to the plantations sector, 0.35 percent to the livestock and dairy sector, 0.29 to the fisheries sector, 7.89 percent for trade, 15.16 percent to the service sector and 13.36 percent to the construction sector, the 2011 Annual Report of the Ministry of Finance and Planning noted.

"Around 28.4 percent of new loans created in 2011 were for consumption and 30.58 percent were classified as ‘other’," Treasury Secretary Dr. P. B. Jayasundera said ealier this year. "The ‘other’ category were loans given for unspecified purposes. Banks have not given a reason for these loans," he said.

"Banks need to change from being trade biased financiers to real economy biased financiers. We have asked the Central Bank Governor as the regulator to bring about a change where local producers and manufacturers will get a 10 to 18 percent share of total bank lending," Dr. Jayasundera said.

He accused banks of favouring the opening of letters of credit (LCs) whereby loans were granted to importers. "We also know that many banks have the practice of opening back-dated LCs when policy adjustments take place, we know this is happening although we cannot prove it," the Treasury Secretary said last May.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=62873

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