By Paneetha Ameresekere – Business Editor
Deputy Finance Minister Dr. Sarath Amunugama recently told this reporter that the way forward to spur credit growth was by inveigling the state banks to start lending and also by reducing state borrowings, thereby releasing funds for private sector investments (See the lead story in the business pages of this newspaper in its August 1, 2010 issue).
According to latest available statistics, state borrowings from the banking sector has reduced, reducing by 9.2% year on year (YoY) by May of this year (though borrowings by state corporations in the period under review had increased by 92.9% YoY), however credit growth to the private sector in the same period had increased by a mere 3.5% YoY, as opposed to double digit growth during better times despite the war raging at that time.
According to unofficial reports, credit growth by June had increased to 6%.
Though one year Treasury Bill yields, a benchmark indicator of interest rates, have fallen by several hundred basis points during the past one year, credit has however not picked up. Banks instead prefer to park their excess liquidity in risk free government securities rather than lend the same to the private sector. Part, or the major reason for this problem is because banks which had a high non performing loan ratio last year were more intent on recoveries rather than on lending that has caused this slow credit growth. It’s said that the two state banks hold 50% of the banks’ total credit portfolio.
How be it, banks, whether they be state or private, are custodians of people’s money. They therefore have a fiduciary duty to lend their money wisely, after ascertaining the credit worthiness of the borrower, this the Government should understand.
While lending to blue chips is not a problem, the problem is in lending to the SME sector, which comprises over 80% of all businesses in the island. Political and economic stability alone may not be enough to spur credit growth, good governance on the part of the State too is important to boost confidence, to induce banks to lend, and on the part of the borrower to invest. For banks to lend and for the private sector to borrow for the purpose of investments, the lender has to have confidence on the borrower’s ability to repay. However the slowness in credit growth may not be peculiar only to Sri Lanka. The West in particular, which was hit hardest by the recent recession, has also witnessed a slackening in credit growth, so much so that in the UK, its Finance Minister George Osborne has asked banks to use their allegedly good half yearly profits to lend to businesses.
So banks’ aversion to lend is not something peculiar only to Sri Lanka. A retired banker, now holding a senior position in a private sector company told this reporter that the slowness in credit growth is allegedly because banks have become risk averse. While the fiduciary aspect also plays an important role, she however alleged that the present day bankers lack the skills set to ascertain the credit worthiness of a borrower, limiting their judgments to collateral based lending. Skills to analyse the potentiality of the business seeking bank credit, or its cash flows, where, from such sound ascertainment, a decision to lend, other than seeking collateral, could be made, is however lacking among present day bankers, the source alleged.
If that be the case, this is where venture capitalists (VC) may have a role to play in the economy of this country. VC are those who will fund a business or a start-up company not necessarily looking for collateral, but on an idea, or a solid business plan, where they may even take an equity stake in such an invested venture, expecting an adequate return on their investments.
Sri Lanka, though it has had its share of VC in the past, they however apparently got their fingers burnt, because they didn’t know when to get out, or didn’t have a proper exit strategy in those businesses in which they invested in. However a new VC has entered the market.Prajeeth Balasubramaniam, Chairman/Managing Director, Blue Ocean Ventures (Pvt.) Ltd., Colombo told this newspaper that he has between US$ 2-3 million in venture capital funding which he wants to disburse in the next 2-3 years. The source of funding is from a network of international VC.
He is willing to invest anything between Rs. 5-12 million on any start-up company. At present they are involved in turning around a local IT company catering to the domestic market which has gone bad. Another of their projects is to start a tourism management school with tourism expected to take-off with the war end and the Hotel School being apparently full. With the paucity of bank credit, it may be good for the Government to create that enabling environment for VC to thrive, to fill in that vacuum created by banks’ alleged aversion to lend.