Making financial service accessible to SMEs

Friday, 17 October 2014 00:00 -     - {{hitsCtrl.values.hits}}

By Waruni Paranagamage Access to finance made for an interesting debate at the National Forum on Small and Medium Enterprise Empowerment, where top professionals from the private and public sector aimed at bringing to light key issues faced. At a prolific panel discussion titled ‘Making Financial Service Accessible, Available and Affordable – A Commercial Banker’s Perspective’ at the forum hosted by the Ceylon Chamber of Commerce (CCC), key areas to be addressed were deliberated. While access to finance is the heart of growing the SME sector, the manner in which they finance themselves influences their ability to grow. Institute of Policy Studies (IPS) Senior Economist Anushka Wijesinha, who was the moderator of the session, stressed that while there are a number of avenues available to gain capital, there is a big difference in SMEs reaching out to friends and family versus banks and financial institutions to have access to finance. “Access to finance is not a new issue in Sri Lanka. It is one that has been around for some time and one that is a crippling issue. But Sri Lanka is not different to many countries and while being mindful of that we should also be happy because this means that there are a lot of initiatives and models where we can see what would work in the country,” he opined. In a recent analysis conducted by the IPS, 49% of the SMEs pointed out that access to finance is a top constraint; 70% who reported that access to finance is a concern said it is particularly difficult to raise funds for the expansion of their businesses. Need for banks to understand SME businesses better Sampath Bank CEO Aravinda Perera acknowledged there is a difficulty in financing the SME sector. “I have handled the business from various societies, and various industries and the problem is gap between the entrepreneur and the banker.” Noting that the gap drives away SMEs from reaching out to banks, he pointed out in most instances it is the fault of the financial institution as they are not fully aware of the business model. “Judging the business by looking at financial statements alone is not enough to pass a loan. There has to be a scientific method. So going over financial statements and the tax payments is more beneficial for SMEs to access finance,” said Aravinda. Touching on the barriers faced by SMEs when opting for a loan, he opined many are of the view that SMEs are high risk customers as they don’t have proper financial and tax records. Disagreeing with the notion, Aravinda asserted that in fact SME are “safe” customers for banks comparing to corporate customers. “To me a SME customer is naturally a better and safe customer than a corporate customer. How we look at it from bank’s point of view, going over and above the financials, is key. I as a banker believe that SMEs have more collateral those corporate customers,” he said. Start-ups are most often established by one or two persons and banks are not willing to accept “one-man shows”. In many instances the banks fail acknowledge that these one-man shows have succeeded in the past. Noting that SMEs are sensitive to economic conditions and slight changes in the external environment have adverse effects on the business, he said the key reason for this is the balance sheets of SMEs are not big enough to cope with the changes in a seamless manner and bankers look into such factors. Commenting on credit recoveries by the SME sector, Perera said that cost of recovering for a bank is much higher here than in any other country in the region due to the country’s legal situation. Banks need to overcome the situation and be more customer friendly in recoveries. “The problem is with the cash flow in the SME sector, this has to be developed. The bank’s targets are aggressive sometimes and that also must be changed. Banks must be more sensitive and patient with SMEs rather than when handling a corporate customer. Since SMEs do not have the support of the financial accountants, banker have to be more careful and must make it a point to be familiar with the SME business,” explained Aravinda. Need for SME infrastructure Discussing Government support and SME access to finance, Hatton National Bank (HNB) Managing Director/CEO Jonathan Alles noted that while the nation can continue to grow in a sustainable manner by developing the SME sector, developing infrastructure facilities alone cannot help reap the benefits. “We have a proportionate amount for infrastructure development. Infrastructure was facilitated to cut short the time spent on transport, but the end plan must be to have facilities such as SME zones and parks which will help reduce the overall cost of production by getting all these facilities in one place,” Alles expressed. He opined that there is no reason as to why Sri Lanka cannot develop infrastructure for SMEs with the current FDI inflow. Alles stressed it is imperative to continue to produce at sustainable costs else businesses will get competitive within the country. Alles noted that before such an initiative kicks off, it is imperative to carry out research with international partners, as such can be effectively done with collaboration with foreign agencies. SMEs are also required to be close to the markets that have good image, good structure and environment; this can be achieved by funding the SME sector in a more transparent manner. He stressed that the SMEs should start producing better cash flows by looking at the business from a long-term perspective. “Understand your business better and have better records of your transactions as it will help you to have better access to finance. There is enough capacity within the banking system to support the SME sector. When we consider SME lending, it is offered at a range of interest rates but better financial discipline is required to have access to it,” Alles told the audience.    Skills development Combining access to finance with access to market is an important ingredient, especially when addressing the lack of collateral, said NDB CEO/Managing Director Rajendra Theagarajah. Focusing on key areas for implementation, he noted the first is the need to develop a greater pool of skilled workforce. “I think whether it is from a bank credit perspective or from a credit building perspective or whether it is a prospective range of the nation as a whole, it is about seeing if there are the right people to support the business. It is good to focus on SME excellence centres,” he said. Secondly, he stressed the SME initiatives should take place in an organised manner where there should be an SME-centric initiative. In that regard, Theagarajah noted it is necessary to bring in stakeholder groups such as those which are the backbone of the SME sector and corporates which have the buying power. “This can be done in a manner where corporates in Sri Lanka can put in their demand based on the global market. This will help in matchmaking and reaching key objectives. It will help address the typical concern Sri Lanka has, that it is an asset-backed financing economy. So the linkage of the corporate buying power effectively insulates the lack of collateral,” he expressed The next is increased focus on governance. Noting that while a lot is being done by banks that helps build governance, Theagarajah pointed out that very little is done to take the culture of governance into the SMEs. “They will have a very good opportunity for regional chambers to engage with the likes of the directors and customise capacity building and so on to enable them to scale up and appreciate the benefits of better governance. There will be a medium to long term direct correlation of the business.”    Financial reporting CA Sri Lanka President and Ernst and Young (EY) Partner Arjuna Herath noting that some are reluctant to prepare accounts, said many SMEs think about the value proposition of preparing the right statement, which is great. “The reason the reluctance is possibly being exposed to business tax. The other reason is the value proposition of preparing right accounts is not appropriate,” he said. Herath noted that financial statements are essential when SMEs are costing their products. He said that handling a financial report is most significant from the start of the SME. “If SME customers cannot handle a financial report, they will not be able to find the real value of expenditure, income and also other monetary operations in the business. Financial reporting has impacts on the sustainability of the business,” he said. Describing the standards of accounting in a SME business, Herath observed it would be helpful for customers to benchmark themselves against their success. He asserted that proper accounting can compare the business with the existence environment, develop future investments and help in getting access to finance.    SME sector perspective Describing the practical situations the SME sector faces when accessing finance, Sabaragamuwa Province Chamber of Commerce and Industry Past President Chamlee Gunaseela said that when a SME entrepreneur copes with the financial sector, sometimes they face communication problems because many of them converse in Tamil. He stressed on the need for better communication to identify their requirements and guide them. “According to my experience, the banks have no unique people to recognise the needs of rural entrepreneurs,” said Gunaseela. He pointed out that even though the interest rates are very low, the SME sector is not keen to borrow money, while banks in rural areas are prioritising marketing and not fulfilling the needs of the SME entrepreneur. “I request the banking sectors to join hands with the regional chambers and support the SME sector for their innovations, implementations and loan getting through institutions,” he said. Pix by Upul Abayasekera