Sri Lanka’s SME sector, whilst being too big to fail can easily be overlooked by larger strategically important corporations during a crisis. ACCA Member and Chairman of Sarvodaya Development Finance, Channa de Silva recommends that small businesses, banks and the state need to change strategy to survive the economic fallout of Covid-19.
Access to bank credit is a key challenge for SMEs in Sri Lanka. Over the past 30 years, small and medium businesses have paid 20% per annum as interest on their loans, de Silva estimates, which is not very sustainable. This is because most SMEs don’t have balance sheets or sound assets that can satisfy conservative bankers. With limited access to finance and high-interest payment requirements, the SMEs sector has not been able to build savings and liquidity for a rainy day. “Unfortunately, what we have now is a perfect storm due to the recession caused by the coronavirus pandemic, threatening to blow the roof off the SME sector,” says de Silva.
According to expert organizations quoting that Sri Lanka’s GDP growth rate will drop by 2.5% this year , De Silva says” the first casualties of a recession or any economic shock, the hardest hit are SMEs, who provide jobs to 45% of the country’s working population and generates over half of Sri Lanka’s Gross Domestic Product. Whilst the state has announced several fiscal and monetary relief measures , they must ensure the concessionary credit line offered to banks reach SME’s spread across the country. Additonally, the process of obtaining concessionary bank loans and applying for debt moratoriums must not be complex, tedious or time consuming. Entrepreneurship is one of the four basic factors of production, so it’s critical to keep this spirit alive and the government needs to devote additional resources to ensure relief measures are deployed effectively, where the country’s banks carry concessionary interest rates and long grace periods that can be lent to the SME sector. Empathy towards SME must be practiced by lenders where the dreams of small entrepreneurs and their aspirations are also facilitated by the bankers putting an extra effort and becomes the need of the hour .“
De Silva further insisted“Sri Lanka must invigorate foreign relations, negotiating new trade deals with ASEAN countries. The most important role of government is to retain economic confidence and commit to providing the necessary impetus for every segment of the economy to reset, strengthen fundamentals and pursue excellence with commitment and passion. Survival is going to be everyone’s priority which is why SMEs has to be at the heart of any strategy to revive the economy and then grow”.
De Silva recommends the three A’s of crisis planning and response relevant to Sri Lankan SMEs.: Act to respond in a sustainable manner and focus on employees and stakeholders; Analyse the different information sources to secure your organisation; Anticipate the business impact and future trends so that organisations can look to innovate.
He further suggests SME’s to consider four aspects when responding to this crisis: First, SMEs have to significantly lower costs by renegotiating terms with employees, lending institutions, lessors and the entire supply chain including suppliers of raw materials and services. Second, SMEs will have to readjust business and marketing strategies fast to generate revenue in a recessionary environment. Third, is to invest in technology especially to connect with a growing e-commerce industry. Integrating IT for production, operational and marketing efficiency will be critical for the future survival of SMEs. Fourth, SMEs must improve boards and governance structures. Boards need to include professionals representing finance, marketing, production and technology. This will ensure competent governance structures are in place to withstand economic shocks.Finally a review of the capital structure may be useful to attract equity investors and infuse capital,”concludes de Silva .