Sri Lanka’s debate over MSME financing has entered a new phase, with the Industry and Entrepreneurship Development Ministry rolling out emergency relief measures even as fundamental disagreements over lending rates remain unresolved.
On one side, MSME associations continue to argue that licensed banks have failed to transmit policy rate reductions fairly, keeping borrowing costs elevated despite easing monetary conditions. On the other, the Industry Ministry and financial authorities stress that immediate relief, stability of the banking system, and risk management must take precedence as the economy navigates post-crisis recovery and climate-related shocks.
The Ceylon Federation of MSMEs has consistently highlighted what it describes as a structural distortion in the interest-rate transmission mechanism following the 2022 crisis. While acknowledging that aggressive monetary tightening was unavoidable at the time, the Federation maintains that subsequent policy easing has not translated proportionately into lower lending rates for small and medium enterprises. According to its submission, the gap between policy rates and market lending rates continues to burden MSMEs, constraining recovery, investment and employment.
The Federation has further questioned the justification for sustained lending spreads, pointing to improved profitability in several licensed commercial banks during the same period. It has urged regulators to exercise supervisory powers more actively and has called for redress mechanisms, including the reversal of what it considers excess interest charged to MSME borrowers.
Against this backdrop, the Industry and Entrepreneurship Development Ministry has taken a more pragmatic stance, prioritising immediate cash-flow relief for businesses affected by Cyclone Ditwah. At a special meeting chaired by Minister Sunil Handunneththi, banks agreed to extend loan repayment periods by three to six months without imposing additional interest or penalties, in line with a Central Bank circular.
From the Ministry’s perspective, these measures demonstrate responsiveness to MSME distress while preserving financial sector stability. Officials argue that banks continue to face legacy risks from the crisis period and must balance credit support with prudent lending practices. Rather than focusing solely on past rate differentials, the Ministry has emphasised coordinated solutions, including concessional lending schemes recommended by the Central Bank.
The agreement to establish a shared database of distressed businesses reflects this approach. By improving information flow between banks and the Ministry, authorities aim to target relief more effectively and avoid delays or duplication. Weekly reviews have been planned to monitor implementation and adjust policies where necessary.
While MSME representatives welcome short-term relief, they caution that repayment extensions alone do not address the underlying issue of credit affordability. The ongoing tension highlights a broader policy challenge: reconciling MSME demands for cheaper credit with the Government’s emphasis on financial stability and orderly recovery.
As relief measures take effect, the effectiveness of these interventions—and whether they can coexist with deeper reforms to lending practices will be closely watched by both entrepreneurs and policymakers.
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