Technical Assistance Consultant s Report Project Number: 49273 May 2017 Sri Lanka: Small and Medium-Sized Enterprises Line of Credit Project (Financed by the Japan Fund for Poverty Reduction) Prepared by KPMG Colombo, Sri Lanka For Ministry of Finance s Department of Development Finance This consultant s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project s design.
Performance Report May 2017 TA 9080 SRI: Small and Medium-Sized Enterprises Line of Credit Project
Introduction The SME Line of Credit is an initiative by the Ministry of Finance and the Asian Development Bank (ADB) where ADB will provide USD 100 million with the aim of channeling more funds to Sri Lankan SMEs via participating financial institutions (PFIs). In particular, the credit line provides incentives to increase lending to SMEs that haven t previously borrowed from a bank, women-led SMEs, and SMEs outside of Colombo District. The first section of this report reviews the credit line s performance and the section 2 discusses an individual impact story. Section I: Performance Analysis Performance is tracked against two broad parameters. First, the PFIs need to disburse the funds; the project will have no development impact if the funds remain undisbursed. Second, the funds once disbursed need to be reaching the intended borrowers. Disbursement Performance On an absolute basis, disbursements have been strong, and almost 100% of the entire tranche was on-lent to SMEs by the end of May 2017. Out of the three banks which were awarded funds, HNB and Sampath have disbursed 100% while DFCC has disbursed 99.89% with a minor residual balance (Table 1). Table 1: Disbursement Summary (as of 31 May 2017) Fund Disbursement Auction 01 Auction 02 Disbursement Start Date 28 th July 2016 30 th September 2016 End of Reporting Period 30 th November 2016 31 st May 2017 Total Days 106 Days 243 Days Fund Utilization Total Auctioned Funds LKR 1,821,832,500 LKR 1,874,978,450 Funds On-Lent to SMEs LKR 1,821,832,500 LKR 1,874,280,117 Utilization 100% 99.96% Development Indicators In designing the credit line, the Ministry of Finance and ADB selected development indicators against which the project would be measured. These indicators focus on borrowers that are often excluded from the banking sector such as first-time borrowers and women-led SMEs. As of 31st May 2017, the project exceeded all the development indicators (Tables 2 and 3). Since August 2016, the percentage of loans to first time borrowers has trended downward and loans to women-led SMEs have trended upward. Meanwhile, there has been a negative trend in working capital loans that are not collateralized with either real estate or financial assets. Additional information on project performance is included in Annexure 1. 2
Table 2: Development Indicators by Period (as of 31 st May 2017) Criteria Target Aug 16 The number of sub loans to SMEs borrowing from commercial or specialized bank for the first time The number of sub loans to SMEs that are led by women The amount of sub loans is lent cumulatively to targeted SMEs SMEs where funds are used for subprojects outside of Colombo District SMEs borrowing for working capital against which fixed or financial assets are not pledged Nov 16 (Cumulative) Table 3: Development Indicators by Bank (as of 31 st May 2017) Feb 17 (Cumulative) May 17 (Cumulative) 10% / 20% a 21.87% 18.40% 25.6 18.49% 5% / 20% a 50% / 70% b 23.75% 23.60% 17.54% 24.32% 86.14% 87.95% 89.5 87.89% - 76.25% 77.1 79.37% 79.94% - 0.00% 0.00% 2.26% 2.16% SMEs led by women - 23.75% 23.60% 13.89% 23.70% SMEs which had not previously borrowed from a licensed commercial or specialized bank. a Increased to 20% from January 2017. a Increased to 70% from January 2017. - 21.88% 18.40% 24.98% 11.95% Criteria Target DFCC HNB NDB Sampath The number of sub loans to SMEs borrowing from commercial or specialized bank for the first time The number of sub loans to SMEs that are led by women The amount of sub loans is lent cumulatively to targeted SMEs SMEs where funds are used for subprojects outside of Colombo District SMEs borrowing for working capital against which fixed or financial assets are not pledged 10% / 20% a 12.50% 17.02% 21.88% 13.5 5% / 20% a 50% / 70% b 18.75% 38.30% 23.75% 16.22% 94.63% 82.80% 86.84% 89.28% - 89.67% 76.24% 74.94% 88.48% - 12.0 0.8% 0.00% 0.00% SMEs led by women - 22.49% 40.44% 19.78% 19.57% SMEs which had not previously borrowed from a licensed commercial or specialized bank. a Increased to 20% from January 2017. b Increased to 70% from January 2017. - 3.30% 4.50% 17.19% 12.8 Nonperforming Loan Statistics There are no nonperforming loans from Auction 2. However, NDB has 5 nonperforming loans amounting to LKR 60,328,504.98 (Table 4). 3
Table 4: Nonperforming Loans (as of 31 st May 2017) Bank Total Portfolio Value (LKR) Total No. of Loans No. of Loans Past Due Amount LKR Avg No. of Days Outstanding No. of Loans Non-Performing Loans Amount Percentage (%) Write Downs No. of Loans DFCC 624,295,000 48 6 121,423,721 18 0 0 0.00% 0 HNB 624,992,300 47 0 0 0 0 0 0.00% 0 NDB 1,379,255,953 160 57 378,124,978 29 5 60,328,504 4.37% 0 Sampath 624,992,816 37 0 0 0 0 0 0.00% 0 Total 3,253,536,069 292 63 499,548,699 47 5 60,328,504 1.85% 0 4
Section 2: Impact Story Mahima Gunawardene: Commercial flower farming Mahima Gunawardene entered the floriculture business when she had to take the responsibility for her family after her husband s death. She started the anthurium business in 1987 and with the help of Export Development Board entered the export market in 2000. Today, she runs the business along with her children. She mainly exports anthurium varieties to the Maldives and Middle Eastern countries. The exports are in the range of 10,000 to 50,000 flowers per month. She supplements her own production through a network of out growers, accounts to 7000 around the country. Ms. Gunawardene very much takes a mentoring role toward the out growers and supports them with training and help in accessing finance. Including the out growers, her business employs 34 people, 90% of who are women. As demand is rising, she conducts training for prospective out growers every month to increase the supply. Ms. Gunawardene is now in the process of building a centralized facility in Pasyala in Western Province for out growers and for tourists. This facility is equipped with green houses, a library for out growers, tissue culture lab, conference room and other services. The four-story facility will also have restaurants, a swimming pool, a fish feeding area, and a play area for kids. She borrowed from Sampath Bank via ADB s SME credit line to fund part of this facility. Her target is to open the centralized facility by 2019 and to expand her exports. 5
Annexure 1: Summary of SME Lending as of 31 May 2017 Disbursements Cumulative as of 31 May 2017 Bank Total Value of Loans Funds Unutilized Disbursed (LKR) (LKR) NDB Bank 1,821,832,500 0 DFCC Bank 624,295,000 697,817 Hatton National Bank 624,992,300 517 Sampath Bank 624,992,817 0 Total 3,696,112,617 698,333 Summary of SME Loans Cumulative as of 31 May 2017 NDB DFCC HNB Sampath Total Total Number of Loans Disbursed 160 48 47 37 292 W.Average Upfront fee (LKR) as a % of principal 1.58% 0.33% 0.00% 0.25% 0.54% W.Average Interest Rate 11.00% 14.1 11.68% 12.00% 11.82% 0.73% points 2.44% points 0.33% above 0.15% above W.Average Interest Rate vs. 0.0 above 6- below 6-month above 6-month 6-month 6-month Average Weighted Prime Lending month AWPLR as AWPLR as of 2 AWPLR as of 28 AWPLR as of AWPLR as of Rate (AWPLR) of 28 April 2017 September 2016 April 2017 28 April 2017 28 April 2017 W.Average Margin over Funding Cost 5.00% 3.45% 3.08% 4.00% 4.15% W.Average Tenor (Months) 56 63 71 82 67 W.Average Equity Contribution of SMEs to Total Subproject Amount 47% 33% 42% 4 36% W.Average SMEs Annual Turnover (LKR) 204,958,411 283,897,924 143,509,612 146,850,103 210,243,655 SMEs W.Average Number of Employees 30 38 43 41 36 Interest Rate Analysis Cumulative as of 31 May 2017 Interest Rate Analysis Percentage of Total Loans NDB DFCC HNB Sampath 9% - 10% 4% 10% - 1 88% 1-12% 4% 79% 12% - 13% 3% 2 100% 13% - 14% 52% 14% - 15% 29% 15% - 16%+ 19% Margin Over Funding Cost Percentage of Total Loans 2% - 3% 50% 79% - 3% - 4% 3% 29% 2 100% 4% - 5% 85% 2 5% - 6% 8% 6% - 7% 3% 7% - 8% 6
Colateral Type (Percent of Number of Loans on Type of Collateral) Not Available 4% Cas h Inventory Moveable Equipment 26% Legal Structure (Percentage of Number of Loans) Partnership 15% Public Listed Company Private Limited Liability Co. 32% Real Estate 63% Other Financial Asset 6% Sole Trader 52% Previous Loan Taken from PFI (Percent of Number of Loans) Previous Loan Taken 17% First Time Borrower (Percent of Number of Loans) First Time Brrower 18% Previous Loan Not Taken 83% Not a First Time Borrower 82% Wholesale & Retail Trade Manufacturing Hotels, Restaurant & Tourism Transport & Communication Agro Processing Construction industry Other Services Health care Livestock and Dairy Fisheries Jewellery& Gem Carpentry, Furniture &Lathe work Mining & Quarrying Apparel & Garments Spices, Minor Export Crops Electricity Gas & Water supply Sector of Activity (Number of Loans) 0 10 20 30 40 50 60 Percent of Disbursement 7
District of Borrower (Percent of Disbursements) Cumulative as of 31 May 2017 3% 4% 3% 15% 9% 4% 3% 23% 3% 2% 4% 2% 7% 5% 2% 2% 8