Enabling Mechanisms to Facilitate Greater Access to Finance for SMEs

1. Future Strategic Direction: The Big Picture for SMEs in Sri Lanka Enabling Mechanisms to Facilitate Greater Access to Finance for SMEs Ananda Silva Deputy Governor Central Bank of Sri Lanka

2. Present Position – Enabling Environment

3. Robust Economic Growth…… • The economic growth remained robust and average growth remain around 7-8% • All sectors have contributed to growth, yet, industry and services sectors constitute bigger share and contribute more to growth GDP and Sectoral Growth Rates – Estimates 2012-2014 The economy is expected to grow by around 7.8%in 2014

4. Continued Increase in Export Earnings • Role of SMEs individually and as a part of the supply chain of large companies, plays a significant role in generating export revenue

5. Growth in Tourism….. • During first 8 months of 2014 tourist arrivals grew by 23.1% to 1,001,643 • Earnings from tourism grew by 32.1% to US$ 1,447.2 mn during the first 8 months 0f 2014 • Continuous increase in tourist arrivals creates ample opportunity to related SMEs to boom

6. Sri Lanka is currently well entrenched in a “virtuous cycle” and a conducive investment environment… Sri Lanka was trapped in a “vicious” cycle for more than 5 decades Sri Lanka is currently experiencing a “virtuous” cycle

7. Downward Adjustment of Interest Rates WAYR of T-bills Primary Market Government Securities Primary Rates Vs. Secondary Market Rates

8. Investors - Long Term Approach: Increased availability of long-term funds

9. In that background, Sri Lanka’s per capita income is expected to surpass US$ 4,000 by 2015, while the GDP would reach US$ 100 bn in 2016… $4,825 (Projected) 2016 GDP $ 88.7 bn GDP $ 101.8 bn $4,240 (Projected) $3,280 GDP US$ 18.9 bn GDP US$ 67.2 bn GDP US$ 59.2 bn 2015 $2,836 2013 $981 2011 2003

10. Present Position – Market Infrastructure

11. Improved Access to Finance Through Expansion of Banking Network Banking Density (No. of branches per 100,000 persons) Required to open 2 branches outside Western Province to open branch in Western Province 21.7 16.1 13.1 16.8 12.9 21.0 14.7 13.6 16.5

12. Expansion Observed in Construction and Tourism Sectors Provide Opportunity for Related SMEs to Emerge Sector-wise Credit Exposures from Licensed Banks

13. Higher Portion of Corporate Loans Granted by Banks are Less than Rs. 1 mn No. of Facilities Amounts • Although number of loans granted to SMEs are a higher portion of total number of loans, those represents a very low share of total loan portfolio

14. Corporate Loans Granted by Licensed Commercial Banks Less than Rs. 5 mn No. of Facilities Amounts Up to Rs, 5 mn : 85% of facilities Up to Rs, 5 mn : 14% in value

15. CBSL Contribution Towards SMEs – Lending Programmes various programmes

16. CBSL Contribution Towards SMEs – Lower Risk Weight for Exposures on SMEs

17. Introduction of New Digitalized Fund Transfer Mechanisms • With the approval of the Central Bank, non-bank telecommunication operators also have introduced mobile phone-based e-money systems in Sri Lanka to effect real time low value transactions. • In order to promote safety and effectiveness of mobile payments services and thereby enhance user confidence of such services the Central Bank issued two mobile payment guidelines specifying broad principles and standards to be followed by institutions providing mobile payment services. • Mobile Payment Guidelines No.1 of 2011 for the Bank-led Mobile Payment Services • Mobile Payment Guidelines No. 2 of 2011 for Custodian Account Based Mobile Payment Services. • The Central Bank assisted in the establishment of Common Card and Payment Switch, which is a technologically advanced common settlement system to facilitate interbank settlements of electronic retail payment systems in Sri Lanka. With the introduction of this common infrastructure, financial institutions will be able offer attractive electronic retail payment products to cater to all segments in the economy.

18. Penal Rate Reduction….. • Banks were used to charge penal rates ranging up to 36% to 48% p.a. worsening the financial position of borrowers facing financial distress • Considering the above CBSL had capped penal interest rate charged on all loans and advances at a maximum of 2% from 1st of August 2013 • This allows some breathing space to companies in financial distress to rectify their concerns and removes the undue burdens to overdue borrowers

19. Future Direction – Enabling Environment

20. Macro Economic Developments Stable Exchange Rate Low Inflation

21. Macro Economic Developments Contd.…. Declining Trend in Private Sector Credit Declining Trend in Interest Rates

22. Sri Lanka: 2020 targets a macroeconomic framework which would reflect several new drivers in the GDP computation tables… 2020 GDP Agriculture Agriculture Fishing Forestry Livestock 2013 GDP Industry Mining and Quarrying Apparel Other manufacturing Electricity, Gas and Water Oil and gas exploration Marine and Aquatic resources Technology and innovation Construction Services Wholesale and Retail Trade Hotels and Restaurants Transport Banking Communication and IT Insurance Real Estate Healthcare Entertainment Education services Ownership of Dwellings Government Services Private Services

23. Sri Lanka: 2020 targets the continuous growth of its NEW ECONOMIC DRIVERS based on the ‘5 Hubs ++’ concept… • Develop renewable energy sources • Oil exploration and production – (Mannar, Cauvery, Southern waters) • Develop oil trade related ancilliary services including gas • Sri Lanka as a top centre in the region for commercial services • Growth of ports and tourism will catalyse the development of Sri Lanka’s commercial sector • Colombo – Container mega hub • Hambantota – Free port, Service and Industrial port declared as a “Free Port” • Galle – Leisure Port • Trincomalee – Port-related industries and Port City • Oluvil – Commercial and fisheries • Kankasanthurei and Point Pedro – Regional ports • Second international airport at Mattala • Modernisation and the 2nd Runway at BIA • Upgrading of domestic airports • Colombo as a regional logistics and services hub • Arrivals target of 4.5 mn by 2020 • Earnings from Tourism – to increase to US$ 6.0 bn by 2020 • IT literacy and internet access for all • Creation of knowledge-based jobs • Promotion of research and innovation • Sri Lanka as an “education” destination • Accredited foreign universitiesin Sri Lanka

24. Sri Lanka: 2020 targets a greater bias towards export of services… • Tourism services • IT/BPO services • Aviation services • Maritime services • Knowledge economy services

25. Future Position – Market Infrastructure

26. STR- to Provide More Access to Finance

27. Amendments to Existing Secured Transaction Act (STA)

28. Expectation Through Amendments to STA

29. Micro Finance Act

30. Further measures to expand availability of funds and utilization • Two investments banks to raise over 10 year tenure long term foreign development finance up to US$ 250 Mn each to provide long term funding for SMEs • Government to underwrite the exchange rate risk • Exemption from income taxes for interest income earned on such lending • Setting up SME Centres

31. Way Forward….. • As the economy becomes broad-based and diversified, so should SMEs • Financial institutions need to look beyond traditional business activities and broaden the availability of types of facilities • Creation of funds to support new ventures to facilitate financial difficulties faced by emerging SMEs • Banks and finance companies to support resolution and revival of SMEs • Private equity funds looking for investments opportunities to consider SMEs with potential • Separate SME board at CSE to allow SMEs to be listed to enhance transparency