SMEs and Budget 2012: Strong Steps, but Tax Relief is Half the Story
- Ministry of Finance has delivered, now time for SME-mandated government institutions to sharpen their focus and address the vital issues
It’s not just about taxes
So, yes, the tax burden on SMEs has been reduced in Budget 2012. This builds on the reduction to 10% of corporate tax rates for SMEs introduced in Budget 2011. But SMEs need more, and it’s not just about tax incentives. SMEs in Sri Lanka are facing numerous other constraints that need to be simultaneously addressed in order for these valuable fiscal incentives to have maximum impact.
Financing SME growth
- Out of the funds available in the Investment Fund Accounts in banks (which was introduced through Budget 2011 to ensure long term finance), 10% must be lent to the agricultural sector and a further 10% to be lent to SMEs.
- State-owned banks (Bank of Ceylon, People’s Bank and Regional Development Bank) will each set up a special SME bank branch in all districts within 2012, and all other banking and financial institutions also encouraged to set up such branches in all districts.
- Interest income from such banking and other fee levying activities will enjoy a reduced income tax rate of 24% (from the standard 28%).
- A government guarantee of 50% for those banks that provide loans to restructure SMEs to improve their performance
These are important proposals. Many regional entrepreneurs complain that bank branches in their area are not SME-friendly and do not know how to evaluate loan applications with an “SME lens”. One entrepreneur in Batticaloa remarked that “most branch managers just don’t know to deal with us, they sometimes treat us like dirt, a nuisance”. The setting up of dedicated SME banking units is, therefore, an important first step. Meanwhile, it is important for all banks to train all their regional banking staff -particularly loan officers and branch managers – on how to cater better to SMEs, which is the majority of their client base in the regions. The Central Bank could also consider some mandated training/orientation for these officers on ‘SME Banking Best Practices’, similar to the mandated training it conducts for bank directors on corporate governance and other issues.
The 10% mandated SME portfolio is also a useful step. But it needs to be carefully monitored by the regulator to ensure it is not abused. For instance, ensuring that a bank doesn’t provide the majority of the portfolio to a few, low-risk enterprises, at the larger end of the SME chain just to comply with the requirement.
At a recent private-public dialogue on the cut-flower industry organised by The Asia Foundation in Nuwara Eliya, it emerged that the awareness of SMEs on special loan schemes is minimal. Out of 10 cut-flower associations, representing dozens of cut-flower SMEs, not one of them were aware of the two concessionary loan schemes offered by the Central Bank (the ‘Saubhagya’ and ‘Viskam’ schemes). There’s clearly a disconnect with the generous and valuable loan schemes on offer and their utilization by the SME sector. Commercial banks must do more to actively disburse concessionary credit lines available to them from multilateral financial institutions, to SMEs.
We could also think of innovative models like revolving funds, financed possibly by donors, that are housed in one or more selected local bank branches, and are used to finance specifically targeted enterprise sectors that are of particular importance to a region – for example, the tourism and cut-flower sectors in Nuwara Eliya. This type of ‘policy-based lending’ would help direct credit to sectors that have the most potential to grow that locality’s economy, provide employment, and reduce poverty.
The role of the Regional Development Bank (RDB) is also now more important than ever in taking up the cause of SME banking. The Lankaputhra Bank (LPB), which was meant to be a strong development bank after merging with the SME Bank and cater better to SMEs, seems to have lost its way.
Again, we have much to learn from neighbouring countries. For example, in the Philippines, SMEs are partnered with Universities and other tertiary training institutions in local areas that have management faculties. Senior students in business administration and related subjects in these institutions run ‘business clinics’ at subsidised fees for local SMEs. This is a ‘win-win’ scenario – the local SMEs are able to get affordable assistance on business improvement, while the students get hands-on business experience and real world insight – thereby improving their non-academic skills and enhancing their employability.
Getting serious about SME strategy
Once the National SME Policy is ready, there needs to be a taskforce to implement the various elements. The taskforce should include representatives of all relevant stakeholder groups – both from the public as well as private sector. Currently there are a myriad of programme and interventions, all of which are strong individually, but are hampered by the disconnect with each other and therefore cannot have the impact that they actually could. This fragmentation and overlap leaves SMEs confused on what programmes are on offer. The National Enterprise Development Agency (NEDA) needs to play a vital coordinating role and assume leadership once more as the apex SME body – this was what was expected of it when it was initially set up as the ‘SME Authority’ under a proposal of the 2002 SME White Paper.
Yes, tax concessions are a vital component in the SME-strengthening effort, and the Budget 2012 has much to offer for SMEs. But tax concessions should not be thought of as the panacea for the struggles of Sri Lanka’s SMEs. Other issues are often equally constraining, and more needs to be done about them. Of course, it is unrealistic to expect such non-tax related policy support from a Budget, but SME supporting institutions have to come into action and address these vital issues without further delay.