Sri Lanka's new Banking Act came into effect in June 2024.
In this Decision Points, Ruvini Fernando, Head of Strategy, Risk, and Transactions at Deloitte Sri Lanka and the Maldives, discusses how the new law will impact credit to SMEs.
For banks to reside in that comfort zone of the large corporates is going to diminish. So they will have to find new ways of managing more lending to SMEs. That means, again, changing your way of sort of running the banking business. Right now, banks are very dependent on collateral, right? So the moment you move into the SME market, that comfort is not going to be there for you, right? You're going to have to find ways to lend in more innovative ways to these SMEs. Their ability to repay can be volatile because they're small businesses subject to all kinds of imageries in the market. So you have to take into account that volatility, the ups and downs that SMEs go through, the need to nurture them to grow to the next level. So banks are going to have to work really hard to understand their new set of customers because without that new set of customers, particularly in SME, they will not have the ability to grow because if it's. Belief that Channel grows that you can also you know then parallelly maybe get the opportunity to increase your lending to the larger corporates also. So it has to grow in parallel in tandem. You cannot sort of not focus on the customers that you didn't focus on before. And when it comes to a retail customers more credit cards or housing loans or whatever that you know the personal sort of financial products that banks providing that again will have to. Evolve, it'll have to be more innovative because there I think you're looking at a customer's ability to access those services faster. Again, use of technology, it's not just physical access anymore, it's also a digital access. So you have to invest in all that. You have to also ensure that your service levels are up to date, that you can monitor cash flows. So the monitoring mechanism also will become more important because you have to, again, without relying on the comfort of collateral. Be able to figure out how these SME businesses are going to produce their cash flows and monitor their performance so that you can recover your loans. So I see a lot of new management challenges coming through, a lot of new investment coming through, and also the way they are going to sell products to their clients and provide the service.
