Thursday Jan 22, 2026
Thursday Jan 22, 2026
Thursday, 22 January 2026 05:49 - - {{hitsCtrl.values.hits}}
The Government has placed micro, small and medium-scale enterprises (MSMEs) as a key pillar of its economic recovery and stabilisation strategy, with a sweeping set of financial interventions rolling out to address longstanding funding constraints, post-crisis stress, and disaster-related disruptions.
Through the Finance, Planning and Economic Development Ministry, it has intensified efforts to expand concessional lending, strengthen credit guarantees, and introduce relief mechanisms for distressed borrowers, while also responding to natural disasters such as Cyclone Ditwah.
Accordingly, all MSME-focused financial facilities have now been pooled into a single framework amounting to Rs. 95 billion, administered through an online, rules-based system designed to minimise discretion and external influence.
Complementing this, the National Credit Guarantee Institution (NCGI) plans to issue Rs. 7,000 million in credit guarantees in 2026, enabling MSME lending of around Rs. 10,000 million and further addressing the chronic collateral deficit faced by small businesses.
Operationally, access to these concessional loans follows a structured process involving preliminary business assessments and field inspections conducted by relevant officers attached to institutions such as the Small Business Development Division, National Enterprise Development Authority, Industrial Development Board, and Divisional Secretariats.
Recommendation letters issued through this process allow entrepreneurs to apply via participating banks, with approvals routed digitally through the Development Finance Department.
Similar procedures apply for agriculture-focused schemes, with initial recommendations issued by officers of the Agriculture, Livestock, Lands and Irrigation Ministry, while disaster relief loans require certification by Grama Niladhari and Divisional Secretaries.
Access to these relief and lending schemes has been broadened through the participation of 16 public and private banks, including five State-owned institutions and 11 private banks, among them Bank of Ceylon, People’s Bank, Regional Development Bank, HDFC Bank, State Mortgage Investment Bank, Commercial Bank, Hatton National Bank, Sampath Bank, Seylan Bank, DFCC Bank, NDB, Nations Trust Bank, Union Bank, Pan Asia Bank, Sanasa Development Bank, and Cargills Bank.
The year 2026 has been positioned as a pivotal year for MSME development, with a major consolidation and expansion of loan programs. Under proposals presented in the 2026 Budget, all MSME-focused loan schemes currently implemented across multiple institutions will be brought under the Development Finance Department, creating a single, transparent, digital, and accountable financing framework.
The Small and Medium Enterprises Leadership and Entrepreneurship Development Project III Revolving Fund Loan Scheme (SMILE III) and the Environment Friendly Revolving Fund Loan Scheme II (E-FRIENDS II) will be merged with the existing “Loan Program for Reviving the Micro, Small and Medium Enterprise Sector in Sri Lanka” (RE-MSME) program and expanded into a new RE-MSME PLUS loan scheme.
An allocation of Rs. 25,000 million has been earmarked for RE-MSME PLUS in 2026, enabling eligible enterprises in agriculture, manufacturing, tourism, export-oriented activities, and services, as well as new startups, to access financing of up to Rs. 25 million at a minimum interest rate of 5%.
The Smallholder Agribusiness Partnerships Program will also be restructured and implemented as the Farming System Sustainability Program under the Development Finance Department, while the Enhancing Small and Medium-Sized Enterprises Finance Project (SMELoC2) Revolving Loan Scheme supported by the Asian Development Bank (ADB) will continue into 2026.
In addition, the Government plans to launch a new $ 200 million program with ADB support, aimed at building a stronger and more comprehensive financial ecosystem for SMEs. This will include targeted lending under the Agriculture Value Chain Program, alongside the continuation of the Odapana Loan Scheme and the Navasapiri Rural Loan Scheme, both of which were introduced in 2025.
Disaster resilience has also been integrated into the MSME financing agenda. Following the devastation caused by Cyclone Ditwah, the Finance Ministry, in collaboration with banks, introduced the Comprehensive Disaster Relief Loan Scheme with a total allocation of Rs. 10,000 million. Under this facility, micro enterprises can access working capital loans of up to Rs. 250,000, small businesses up to Rs. 1 million, and medium and large enterprises up to Rs. 25 million, with a repayment period of three years and a six-month grace period. The concessional interest rate of 3% per annum is expected to significantly ease the recovery burden for enterprises across agriculture, plantations, livestock, fisheries, tourism, manufacturing, and services.
In 2025, five concessional loan schemes were implemented under the Development Finance Department, reflecting a significant scaling up of State-backed credit. The flagship Re-MSME, funded through domestic resources, targeted both viable enterprises and those facing repayment difficulties or constrained access to credit. As at December 2025, capital and working capital loans amounting to Rs. 16,468 million had been disbursed to 1,720 enterprises under this program.
Parallel to this, the ADB-supported SMELoC2 continued to play a major role in SME financing. For 2025, allocations of Rs. 5,500 million, Rs. 14,830 million, and Rs. 1,360 million were made respectively for different components of the project, with the revolving component alone disbursing Rs. 12,380 million in loans by end-December 2025. These funds were channelled through the banking system to improve liquidity and investment capacity in the SME sector.
The Government has also used targeted interest subsidy schemes to stabilise agriculture and food supply chains, which are heavily dominated by MSMEs. Under the New Comprehensive Rural Credit Scheme, Rs. 1,648.7 million was allocated, of which Rs. 1,585.2 million was utilised for interest subsidy reimbursements, benefitting more than 64,000 farmers.
In the paddy milling sector, concessional loans at an interest rate of 7% were extended to micro, small and medium-scale mill owners to facilitate paddy purchases. Through this scheme, Rs. 13,426 million was disbursed to 673 millers, while Rs. 114.1 million was reimbursed as interest subsidy from a Rs. 390 million local fund allocation. A total of 109,158 tons of paddy was purchased during the 2024/25 Maha and 2025 Yala seasons, creating a buffer stock that can also be deployed as a safety mechanism in market interventions.
Alongside fresh lending, the Government has also moved to address stress in existing loan portfolios following the prolonged economic downturn that began in 2019. Many medium-sized enterprises experienced sharp declines in operating capacity, impairing debt servicing ability and exposing assets pledged as collateral to legal recovery action.
In response, amendments were introduced to the Banks’ Debt Recovery (Special Provisions) Act, No. 4 of 1990, enabling SMEs to enter structured debt restructuring arrangements, while the suspension of the Parate Law was extended until 31 March 2025. Under these measures, grace periods were granted, and discounts were provided on accumulated unpaid interest, easing cash flow pressures.
In addition, relief was channelled through the RE-MSME loan package, which also allowed eligible entrepreneurs to access fresh working capital based on business assessments and approved revitalisation plans. Under this facility, 91 SMEs received interest concessions, 412 enterprises restructured their existing loans and resumed repayments, and restructured loan values exceeded Rs. 15,000 million, signalling a significant effort to rehabilitate distressed but viable businesses.
One of the most transformative policy shifts has been the Government’s move to tackle the collateral bottleneck that has historically constrained MSME lending. Financial institutions remain heavily collateral-driven, effectively excluding many micro and small entrepreneurs.
To bridge this gap, the NCGI was established as a dedicated institution to provide credit guarantees to banks. Project activities commenced in January 2025, and by December 2025, 1,234 entrepreneurs who lacked acceptable collateral had received guarantees worth Rs. 5,099 million, enabling them to access loans totalling Rs. 7,435 million. This mechanism has materially reduced entry barriers to formal finance for smaller businesses.
The MSME sector, which spans informal rural micro businesses to export-oriented enterprises earning substantial foreign exchange, accounts for more than half of total employment and GDP and represents nearly two-thirds of all enterprises operating in the country, underscoring its systemic importance to inclusive growth and social stability. Therefore, the measures seek not only to stabilise a sector battered by economic shocks, but also to position MSMEs as a durable engine of growth, employment, and resilience in the years ahead.
