Credit Guarantee Schemes in Sri Lanka

Sri Lanka has a well developed competitive insurance industry

Major players in the industry do not supply Credit Guarantee Products

CBSL implemented credit guarantee scheme to provide credit guarantee mainly for the agricultural and SME sector

Objective of Credit Guarantee Schemes (CGS) CGS are set up with the purpose of covering some portion of losses incurred when borrowers default on loans. The purpose of such schemes is to encourage financial institutions to lend to small businesses with viable projects of success but are unable to provide adequate collateral or do not have

suitable records of financial transactions to prove that they are creditworthy.

Legal Background In terms of Section 108(1) of the MLA of 1949, the CBSL acts as the government agent in

guaranteeing the loans granted by Participating Credit Institutions (PCIs) under special development programs.

An amendment to MLA in 1974 facilitated CBSL to operate guarantee schemes on its own on account of loans granted to small enterprises and agricultural activities.

Accordingly, CGS implemented by the CBSL are categorized as GOSL guaranteed projects and CBSL guaranteed projects.

CBSL’s Involvement

CBSL has been playing a key role in facilitating micro-finance since 1960s.

The number of projects that the CBSL involved exceeds 100. However only

about 10% of those projects were given credit guarantees.

CGS Implemented by the CBSLScheme Current Position

1. Small & Medium Scale Industries Programme (SMJ) I, II, III and IV

Concluded, Post claim monitoring

2. Small and Medium Enterprises Assistant Project (SMAP)

Concluded, Post claim monitoring

3. Bus Purchase Loan Scheme (BPL)

Concluded, Post claim monitoring

4. Mid Country Perennial Crops Development Project (MCPCDP)

Concluded. Most of the loan rescheduled recently.

CGS Implemented by the GOSL

Scheme Current Position5. New Comprehensive

Rural Credit Scheme (NCRCS)

In Progress

6. Tea Development Project (TDP)

In Progress

7. Second Perennial Crops Development Project (SPCDP)

In Progress

8. Apparel Sector Credit Guarantee Scheme

Guarantees to be issued. Temporarily suspended until funds are received from the Government.

CGS Implemented by the CBSL

Scheme Current Position

9. Small Holder Tea Development Project (SHTDP)

In Progress

10. Plantation Sector Reform Project (PSRP)

In Progress

11. Agricultural Rehabilitation Project (ARP)

Concluded, Post claim monitoring

12. Susahana Credit Scheme

In Progress

13. C G Scheme for Jem & Jewellery Sector

To be issued

Operation of the System Implementation of a CG scheme is more or

less similar to that of any insurance scheme.

In CG schemes, PCIs are responsible to undertake certain activities such as:

a) Prepare proper appraisal of projects.

b) Take sufficient securities.

c) Observe normal care & prudence in distributing the loans.

d) Pay premia timely.

e) Follow the Operating Instructions issued by the CBSL.

CBSL Liability

The liability of the CBSL on loans depends on the defaulted amount of loans, extent of guarantee cover and ceiling of guarantee payments. The extent of guarantee cover varies between 50%- 90% and the ceiling of guarantee payment varies between 1.6 mn and 2.0 mn.

Validity of Guarantee

Validity of guarantee ceases in the event of:

a) Premium not being paid within a stipulated period.

b) Confirmation of assignment of collateral being not received within a stipulated period.

c) PCIs failed to observe normal care & prudence and/or having been negligent in the disbursement/monitoring of the loan.

Claim Payment Procedures

Claim payment can be requested after expiry of one month, but not later than six months, from the date of serving of the Notice of Demand.

The first installment, varies between 50% - 70% of the claim payable, is paid upon serving the Demand Notice.

The balance is considered when the PCI produces evidence of instituting legal

action(producing the case number).

Post-claim Recoveries

PCIs should pursue recovery action after the receipt of the claim settlement and should share, any such recovery, between the CBSL & the PCI as stipulated in the Operating Instructions.

If the PCI fails to institute such action within the period specified by the

CBSL, the CBSL reserves the right to recover the sum paid in settlement of a claim, by debiting the account of the PCI at CBSL.

Sources of Funds

a) CBSL or GOSL Contribution

This provides the initial capital for CGSs.

b) Premia Collection

PCIs are obliged to pay a premium determined under each project to receive CG cover. Annual premium value varies between 0.5% to 1.5% of total outstanding value of the loan.

c) Investment Income on a) and b)

Initial capital received & premia collected are invested in government treasury bills in order to augment the resources available.

Global Economic Crisis

Global financial crisis spurred from the collapse of the US Sub prime Mortgage Market in 2007.

Then crisis was soon followed by the current global economic crisis.

The emerging economics that showed accelerated economic development have been affected by the global economic crisis.

Global Economic Crisis

Global financial crisis spurred from the collapse of the US Sub prime Mortgage Market in 2007.

Then crisis was soon followed by the current global economic crisis.

The emerging economics that showed accelerated economic development

have been affected by the global economic crisis.

In the case of Sri Lanka

Capital account has not been fully liberated.

Many local banks did not trade in complex financial instrument.

Direct impact of the financial crisis on the country’s financial sector was minimal.

The effects of the turmoil are being felt strongly by the country specially real

sector of the economy. However

Sri Lankan economy demonstrated its reliance Sri Lankan economy recorded a real growth of 6% in 2008. This is the fourth consecutive year in which the economy recorded a growth of 6% or above.

Sri Lankan economy demonstrated its resilience

Sri Lankan economy recorded a real growth of 6% in 2008.

GDP for 2008 was projected to grow by 6.5 – 7.0% at the beginning of the year. During the first quarters, GDP grew by 6.5%. However, GDP grew only by 4.3% during the 4th Quarter.

Further in 2009 1st quarter grew by 1.5%.

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Many foreign investors repatriate their short- term investment back to their countries (increased out flow of foreign exchange).

Declined inflow due to lower demand for exports such as tea,rubber,cinnamon,

apparel products, diamond, jem and jewellery, etc.

Many exporters operate with comparatively low profit.

The Tea industry was affected due to the reduction of the tea prices.

- Most of Sri Lankan tea markets were initially affected by the

economic recession.

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- Byers returned to the market in mid December 2008.

- Market was active in the first half of the 2009.

- Last year earned 1.2 billion Dollars which was significant and clear sings that tea was moving forward.

- Byers returned to the market in mid December 2008.

- Market was active in the first half of the 2009.

- Last year earned 1.2 billion Dollars which was significant and clear

sings that tea was moving forward.

Rubber and cinnamon also declining.

Other industries such as rubber based products, diamond and jewellery, ect. were also affected by the crisis.

Tourism industry was badly affected.

It is observed that Borrowers will find it difficult to repay their loans.

There will be a tendency for increased credit guarantee claim applications.

Positive Trends in the Sri Lankan Economy

The inflation rate has been dropped.

Prices of food items are unlikely to indicate a trend increase. The agriculture sector is expected to reflect a high growth rate in 2009.

With the dawn of peace greater opportunities for the expansion of development and economic activities in the

North.

Measures to boost economy

Actions have been taken by CBSL for reducing interest rate to about 3 percent.

Subsequent to the rate reduction, the lending rates for priority sectors such as …………………………………had been reduced up to 2 per cent.

Suspension of the penalty interest rates for delayed debt repayment.

Temporary suspension of legal action against those who are no repay debt after July 2008.

One month’s working capital provided to tea factories.

The recovery of loans extended to tea factory owners has been suspended

for a period of one year.

Reducing the interest rate, extending the repayment period, for rubber factories.

New bilateral agreements between Sri Lanka and Russia and Iran are for tea and China and India in relation to rubber.

Some incentives have been introduced for the special refinance loan scheme to assist the small and medium enterprises (SME) affected by Tsunami.