Technical Assistance Consultant's Report Sri Lanka

Technical Assistance Consultant’s Report

Project Number: 49273 February 2017

Sri Lanka: Small and Medium-Sized Enterprises Line of Credit Project (Financed by the Japan Fund for Poverty Reduction)

Prepared by KPMG

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 February 2017

TA 9080 – SRI: Small and Medium-Sized Enterprises Line of Credit Project

Performance Report: March 2017

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 second section discusses individual impact stories.

Section I: Performance Analysis

As of February 2017, ADB has disbursed $25 million. The funds were allocated via two auctions that allowed PFIs to bid on the funds. The first auction was concluded on the 27th of April 2016 where 9 PFIs participated and one PFI, National Development Bank PLC (NDB), won the whole tranche of USD 12.5m at an interest rate of 6.01% (Annexure 1). The second auction was concluded on the 28th September 2016 where 10 PFIs submitted bids and three banks won as follows:

Allocated Amount Bank Bid Rate Bid Amount (USD) (USD) DFCC 11.01 4,200,000 4,166,666 Hatton National Bank 8.60 4,200,000 4,166,666 Sampath Bank 8.25 4,200,000 4,166,666

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. Performance Analysis – Disbursement On an absolute basis, disbursements have been strong, and almost 90% of the entire tranche was on-lent to SMEs in approximately in 3 months’ time. Out of the three banks which were awarded funds, HNB and DFCC Bank disbursed over 90% of the allocated funds and Sampath Bank 79.9% as of 28th February 2017. Table 1: Disbursement Summary (as of 28 February 2017)

Fund Disbursement Auction 01 Auction 02 Disbursement Start Date 28th July 2016 30th September 2016 End of Reporting Period 30th November 2016 28th February 2017 Total Days 106 Days 145 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 1,649,328,300 Utilization 100% 87.97%

TA 9080 – SRI: Small and Medium-Sized Enterprises Line of Credit Project

Performance Report: March 2017

Performance Analysis – 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 28 February 2017, the project has exceeded all of the development indicators. Since August 2016, the percentage of loans to first time borrowers and loans to women-led SMEs have trended upward. Meanwhile, there has been a positive increase in working capital loans that are not collateralized with either real estate or financial assets. Table 2: Disbursement Indicators (as of 28th February 2017)

Criteria Target Aug 16 Feb 17 Success

The number of sub loans to SMEs borrowing from commercial or specialized bank ≥ 10% 21.87% 26.40% for the first time

The number of sub loans to SMEs that are led by women ≥ 5% 23.75% 21.60%

The amount of sub loans is lent cumulatively to “targeted SMEs” ≥ 50% 86.14% 89.57%

SMEs where funds are used for subprojects outside of Colombo District - 76.25% 71.95% SMEs borrowing for working capital against which fixed or financial assets - 0.00% 5.67% are not pledged SMEs led by women - 23.75% 26.89% SMEs which had not previously borrowed from a licensed commercial or - 21.88% 20.67% specialized bank.

Additional information on the SMEs assisted under the program is included in Annexure 1.

TA 9080 – SRI: Small and Medium-Sized Enterprises Line of Credit Project

Performance Report: March 2017

Section 2: Impact Stories

Damith Nishantha: Recycling his way to growth Damith Nishantha, working in the Pokunuwita in the Kalutara District of Sri Lanka, has been in business since the age of 11. He started at that age selling ornamental fish after school. On finishing high school, he started his own anthurium farm, growing and selling cut flowers in the suburbs. Then in 2005, with the help of his wife Tharanga Damayanthi, he branched into a new business—the Senasuma Polythene Center. In this business, he collects used polythene from the Colombo and Kalutara area and recycles it to make 378 products for resale island-wide. Among the products he makes are for agriculture, net houses, and food packaging. He employs 20 staff and also offers indirect employment opportunities to about 20 households in the Pokunuwita area where they are involved in sorting the used bulk polythene. He now owns three sales centers in Horana, Pokunuwita and Matara and his sales amount to 60 tons per month. Yet, increasing rental costs and lack of storage space were major constraints. Fortunately, he was able to tap into ADB’s small and medium enterprise credit line through DFCC bank. "I was able to secure 709 square meter land to put up a three story building of my own, which will increase my storage capacity and will save the high rent I paid for my sales outlet,” he said. He is planning to open his new outlet in June 2017.

“Nishantha is confident that he can cater to increasing demand with a new facility”

TA 9080 – SRI: Small and Medium-Sized Enterprises Line of Credit Project

Performance Report: March 2017

Thivanka and Kumari: Meeting the Demand for dairy Thivanka was a banker by profession and entered into the dairy business by chance. He learned the business of making dairy products working at a dairy company in Mirigama, which is owned by a friend of his father. In 2010, he started “Ranbima Dairies” in Dewalapola located in Gampaha District in partnership with his wife Iresha Kumari. The business is now at the stage where they need to expand due to rising demand. Thivanka mainly produces varieties of cheese, curd, yoghurt and fresh milk, and distributes these to reputed hotel chains in Negombo, Colombo, Kandalama, and Jaffna. His capacity is only 300 liters per day against a demand for 1,000 liters per day. Milk is supplied by 30 farmers in the neighborhood daily with two weeks credit given. Due to the high risk in storing conditions and unavailability of a standardized facility his production is limited. He learned about the ADB SME credit line from the manager of Sampath Bank. Through this, he borrowed money to set up a separate unit, including a freezer and storage facility which boosted his capacity to 1,000 liters per day. “We can now cater to high demands as we can do more production and store produce during the off season, which we were unable to do for the last 7 years,” Thivanka Wijayasinghe said. “We are planning to have our own farm to cater for the daily demand for milk.”

“Thivanka and Kumari started by selling dairy products using their motorbike to cater to a daily requirement of 6 liters.”

TA 9080 – SRI: Small and Medium-Sized Enterprises Line of Credit Project

Performance Report: March 2017

Ayesha Fernando: Supporting Women One Bite at a Time Ayesha Fernando, proprietor of Ayesha Bites, became the bread winner of her family when her husband passed away 20 years ago. To get by, she started a small snack business in Thimbirigaskatuwa located in Gampaha district with the help of two assistants. Today, she runs a family business with the assistance of two sons. She does business on a cash and credit basis. About 15 buyers based in Colombo purchase products from Ayesha wholesale and distribute them island wide. She specializes in five different savory products. The production team is now around 22 employees but she is frequently faced with lack of labor. To overcome the problem and to maintain the full production capacity, she needed to move from being labor intensive to machine oriented production. Through the ADB SME credit line via Hatton National Bank, she was able to purchase a

few machines which cut her labor requirements.

She now presides over a smooth production process that gives her higher production efficiency and a safe environment for the workers. She bought a unit that automated the mixing process. Also, the traditional burners were replaced with diesel burners, which are safer, and more efficient, . The conventional cutters were also replaced.

“I have come a long hard way as a widow and a business woman, and now I am looking

forward for a more rewarding future,” she said.

TA 9080 – SRI: Small and Medium-Sized Enterprises Line of Credit Project

Performance Report: March 2017

Annexure 1: Summary of Second Auction Bidding

Bank Name Bid Rate Bid Amount Allocated Amount

DFCC 11.01 4,200,000 4,166,666 Hatton National Bank 8.60 4,200,000 4,166,666 Sampath Bank 8.25 4,200,000 4,166,666

National Development Bank 8.11 4,200,000 0.00 Nation's Trust Bank 8.10 4,100,000 0.00 Seylan Bank 8.00 4,100,000 0.00

Commercial Bank of Ceylon 7.35 4,200,000 0.00 Regional Development Bank 7.19 4,200,000 0.00 Peoples Bank 7.00 4,200,000 0.00 Bank of Ceylon 2.85 3,000,000 0.00

Annexure 2: Summary of SME Lending as of 28 February 2017

Fund Disbursement Total Value of Loans Utilization of SME Funds Unutilized Bank Disbursed (LKR) Credit Line (LKR) (LKR) NDB Bank 1,821,832,500 1,821,832,500 - DFCC Bank 624,992,817 605,445,000 19,547,817 Hatton National Bank 624,992,817 616,833,300 8,159,517 Sampath Bank 624,992,817 427,050 427,050 Total 3,696,810,951 3,044,537,850 652,273,101

Summary of SME Loans NDB DFCC HNB Sampath Total Total Number of Loans Disbursed 166 43 44 28 281 W.Average Upfront fee (LKR) as a 1.58% 0.011% N/A 0.017% 0.004% % of principal W.Average Interest Rate 11% 14% 12% 12% 12% 0.73% points 2.36% points 0.38% points 0.12% higher 6- W.Average Interest Rate vs. below 6-month higher 6-month below 6 -month month AWPLR Average Weighted Prime Lending N/A AWPLR as of 2 AWPLR as of 3rd AWPLR as of 3rd as of 3rd March Rate (AWPLR) September 2016 March 2017 March 2017 2017 W.Average Margin over Funding 5% 3% 3% 4% 4% Cost W.Average Tenor (Months) 56 63 71 74 67 W.Average Equity Contribution of 47% 33% 41% 40% 37% SMEs to Total Subproject Amount W.Average SMEs’ Annual 204,958,411 290,161,695 145,258,845 190,906,379 216,268,788 Turnover SMEs’ W.Average Number of 30 38 44 48 36 Employees

TA 9080 – SRI: Small and Medium-Sized Enterprises Line of Credit Project

Performance Report: March 2017

Interest Rate Analysis Percentage of Total Loans NDB DFCC HNB Sampath 9% - 10% 4% 10% - 11% 88% 11% - 12% 4% 77% 12% - 13% 3% 23% 100% 13% - 14% 1% 53% 14% - 15% 33% 15% - 16%+ 14% Margin Over Funding Cost Percentage of Total Loans 2% - 3% 51% 77% - 3% - 4% 3% 33% 23% 100% 4% - 5% 85% 16% 5% - 6% 8% 6% - 7% 3% 7% - 8% 1%

TA 9080 – SRI: Small and Medium-Sized Enterprises Line of Credit Project

Performance Report: March 2017

Colateral Type (Percent of Loans on Type of Collateral) First Time Borrower (Percent of Loans Disbursed) None Inventory Moveable 3% 1% Equipment 21% First Time Borrowers 35%

Other Financial Asset Not First 9% Time Borrower Real Estate 65% 66%

Existing Customer of PFI Legal Structure (Percent of Disbursements) (Percent of Disbursements)

Previous Private Loan Taken Partnership Limited 30% 17% Liability Co. 37%

First Time Borrower 70% Sole Trader 46%

Sector of Activity

Manufacturing

Hotels, Restaurant & Other Services Wholesale & Retail Trade Agro Processing Construction industry Health care Carpentry, Furniture &Lathe Fisheries Apparel & Garments Livestock and Dairy Mining & Quarrying Spices, Minor Export Crops Jewellery& Gem Electricity Gas & Water supply Transport & Communication 0 10 20 30 Percent of Disbursement

TA 9080 – SRI: Small and Medium-Sized Enterprises Line of Credit Project

Performance Report: March 2017

District of Borrower (Percentage of Disbursements)

5% 3%

6% 3% 10% 12% 6%

14% 1% 2% 3% 5% 3% 4% 4% 7%

3% 3%