Do local lending institutions contribute enough towards development of the country’s economy?

There are several development banks in the country which are categorised as specialised banks and were actually set up with the aim of providing financial assistance to the needy, especially in the hospitality trade and tourism, industrial, fisheries, shipping and logistics and agricultural sectors. It may be of interest to find how active they are now and to what extent or quantum they have succeeded in contributing towards this worthy cause – Pix by Shehan Gunasekara

By Ravi Amarasinghe

This is a question that has been bugging me from time and again for several years. As an ex-banker with significant experience in the lending area of banking both locally and abroad, I feel it’s my duty to bring to light the negative and lethargic approach adopted by many institutions in the sector if not the most. 

A recent survey conducted by me on a personal level revealed the true face of the “not concerned” attitudes and/or the lack of enthusiasm that have been prevailing for some time now. The probable reasons and considerations, I managed to collect, could be summarised in the following manner. This may not be the real picture but will certainly present a fair indication of the grave situation we are in as of now. 

• Severe shortage of trained, competent and experienced staff to carry out credit evaluations in a practical way to ensure purpose-driven lending for development purposes.
• Lack of understanding of the prospective clients’ actual/genuine requirements.
• Analytical approach to study credit worthiness of prospective borrowers.
• Dependence on printed questionnaire to prepare credit appraisal reports and by doing so most important and crucial criteria may not be highlighted, keeping the decision makers in the dark.
• Information gathered mostly through Know-Your-Customer (KYC) Form which, more often than not, doesn’t contain an analytical study of the client’s past performance or financial position.
• On most occasions call reports customer visits and/or inspection reports have not been filed as important records.
• nLack of proper understanding of collateral arrangements and legal documentations.
• Pre-arranged time schedules for monitoring of advances granted with emphasis on the purposes for which the advances were given.
• No proper ‘risk assessment’ other than the information collected from the Credit Bureau.
• Practice of obtaining references from other bankers is not considered as important.
• Assessment methods such as S.W.O.T., P.E.S.T. and comparison of crucial financial ratios and industry averages are not considered for decision making.
• No established grading system, compatible with international standards, for advances apart from external auditors’ management reports. 

Please forgive me for stating this openly, all most all lending institutions are mainly interested only in the income they can derive out of a lending but not the betterment of the client’s business or country’s economy. Once I can remember a very senior banker (who happened to be my boss one time), told me: “There are no risk managers any more in banks now but only ‘no-risk managers’ instead.”

It sums up a story in depth considering the prevailing lending attitudes of the financial sector. Huge sums are declared as net profits which indicates they are more concerned on the share value rather than development. Of course cannot blame them, the controlling authorities may not have made it compulsory for them to invest in the most important sectors of development.

Simply walk in to any commercial bank operating in the country with a request for an advance the first question will certainly be on what sort of security you can offer as collateral. If the credit officer/manager is satisfied it’s safe to lend, the second question will be the purpose for which the advance is required. It’s definitely ‘cart before horse’ isn’t it? That’s the approach present day and do you need anything more to find out or confirm it?

Role of development banks

There are several development banks in the country which are categorised as specialised banks and were actually set up with the aim of providing financial assistance to the needy, especially in the hospitality trade and tourism, industrial, fisheries, shipping and logistics and agricultural sectors. It may be of interest to find how active they are now and to what extent or quantum they have succeeded in contributing towards this worthy cause. 

I can remember on several occasions special schemes were introduced with refinancing arrangements to finance Small and Medium Scale industrial projects but unfortunately only a few genuine participants benefited by them. In most instances the low-cost funds were diverted to other businesses. Lack of close monitoring of usage of funds wasn’t there in place as required and therefore they ended up in total failures. The genuineness of the intended purposes and the results of ‘post mortem’ reports have not been verified or analysed for future reference or guidance when considering new advances. 

Lack of proper data base on blacklisted borrowers with reasons for blacklisting is another drawback for a comprehensive evaluation and risk assessment. If a credit manager takes utmost care to establish the genuineness of the borrowers’ intentions, half the battle is won and the rest is the suitability of the financial package he can offer to the client with emphasis on close monitoring of disbursed facilities. Security and collateral is a secondary matter with the possibility to fall back on them in case the primary method of recovery from the business resources fails.

We all know Japan in its entirety was built with borrowed capital and leased machinery. Japanese became masters in the leasing business over the years. The key was genuineness in approach and clear intentions to develop the country. Today they are in the top slot of industrialised countries of the world. In the earlier stages they struggled hard to achieve high quality through sheer hard work and dedication. The results are quite encouraging with productivity at its peak. 

They started with push cycles and today they manufacture the most sophisticated equipment and have become the world leaders in several popular brands. Early stages both employers and employees travelled on bicycles to their work places and the cars were luxuries for most of them. Only a few giant businessmen used them. Today even a labourer can afford a car and they have come to that stage through sheer hard work.

Pathetic situation 

in Sri Lanka

The wrong approach in Sri Lanka is very pathetic. When establishing a business, the first and foremost thing is purchasing a luxury car even before the first rupee is earned. Purchasing or leasing machinery is a secondary matter although it’s known well and truly that the machinery should start rolling to earn the first rupee. 

It’s alarming to note that there are several financial institutions which are more interested in leasing vehicles almost overnight but there are only very few trying to help with leasing of machinery for a genuine business. The real story is the idea behind, whereas a leased car could be seized at any point in case of default on payments but machinery may be difficult to take over as there is no proper legal ownership unlike in vehicles. Seized vehicles can easily be sold unlike machinery because of the inability to find another suitable industry. So it’s high time the concerned authorities take notice of this aspect. 

The laws available are either outdated or obsolete and cannot be used practically from what I understand. In my view the Government should take immediate steps to introduce a fool-proof system by enacting suitable laws and establishing institutions to deal with the matter on a priority basis. Leasing of machinery to a genuine industry may be the only way to develop the sector especially in an era where more emphasis is placed on Small and Medium scale Entrepreneurs and they are encouraged to contribute a sizeable share for development of the Country’s Gross Domestic Product (GDP). 

Leasing of machinery would facilitate payment for them in instalments, so that the entrepreneurs will not be required to tie-up their meagre resources in fixed capital. It will also enable the investor to opt for higher quality with modern technology, which will in turn improve the final quality of their products. The marketability is bound improve if the quality is higher. 

Cottage industry 

financing schemes

Another important area that has not been tapped with a realistic approach is cottage industry financing schemes. The Chinese have mastered the method of producing various consumables that are essential for day-to-day life in their home manufacturing units. I have seen some companies, organisations and individuals trying to develop this aspect but they lack proper resources and professionalism to widen the operational areas to develop into significant volumes due to drawbacks in marketing of products. 

In this area we should learn from the Chinese investors who starts with canvassing orders first and then manufacturing them to satisfy the requirements/specifications of buyers so that there is no necessity to keep unsellable stocks. This method can also be termed as “contract manufacturing” and it ideally suits for a small developing country like ours. 

Therefore our financial sector can easily formulate suitable schemes to promote this important area of industrial development. This can lead to better opportunities to get in to contract manufacturing products for the export market if correct channels are used to tie-up foreign buyers. The potential is vast and more emphasis must be placed to develop it into a lucrative economic sector.

Robotic approach

I will fail in my duty if I do not highlight another weakness in our banking systems. I can see more and more dependence on a “robotic” approach with automations in every area with encouragement to “self-banking”. In operational matters this may a good development but when it comes to lending area, a personalised approach can never be replaced with robotics simply because the personal touch is vital to understand the clear intentions of a prospective borrower. 

There must be an experienced and knowledgeable credit officer who can gauge the genuineness of the credit requirements and intentions of a client. As of now no machine has been developed to do this job but may be in time to come it may become a reality. We have to be patient until then. 

It must be stated here that lack of personalised touch has led to many frauds and robberies through cyber-attacks in recent times. Therefore bankers will soon realise that there is a limit to modernisation in all areas of banking. 

In my view either little or nothing has been done to identify the talents and potential of the Sri Lankans at large and encourage them to use their enterprising skills and ability towards development of the economy. The frame of mind should be fine-tuned to understand the importance of development as a nation.

It’s most disturbing to see the young generation holding placards on the roads and wasting their valuable time quite unnecessarily and the Government should take a serious note of it early. Remedial steps should be taken as quickly as possible through negotiations and eradicate this menace to put the country on its right path for development.

(The writer could be reached via email [email protected].)