Thursday Nov 14, 2024
Thursday Nov 14, 2024
Wednesday, 4 December 2013 00:00 - - {{hitsCtrl.values.hits}}
Firstly let us look how this fund was formulated. The Government, with its Budget proposals for 2011/12 (1 January 2011 effective), corporate tax on banks were reduced from 35% to 28%. Similarly Financial Services VAT was reduced from 20% to 12%.
The differential in the tax saving was instructed to be kept aside predominantly for financing to SME sector with a set of guidelines how to use it. These funds were accounted within the shareholder net worth as a reserve.
Although guideline gave some selection criteria, that had no dramatic influence on the normal course of business of banking, therefore SMEs benefited only through reduced interest rates and longer repayment terms. But the credit appraisal process at banks was under the same criteria of their respective bank policies. Naturally, this is due to IFA funds still belonging to the bank shareholders.
Public-Private Partnership
Suppose that the IFA allocation was kept outside the net worth of the shareholders and considered as a sunk cost to the bank but still enjoy the returns of the funds with given tax concessions, policy makers could have driven more strategically important projects with higher risk appetite towards financing clients. This does not mean to dole out money to selected customers.
Further policy makers could have directed at least 50% of IFA funds to be allocated by way of ‘venture capital’ to projects of national interest. Maybe even up to 75% or 80% of the project cost could have been funded based on the project feasibility alone to the tune of maybe Rs. 100 m or going up to Rs. 500 m a project.
The project promoters will commit the balance as their equity whilst the bank becomes the convertible preferential share holder for the financed stake. The board of directors of any company of this nature will be represented by the officials from the financing bank for better implementation and monitoring of performances to safeguard the investment.
Therefore, this method of financing become a true PPP (Public-Private Partnership) where the public money is invested maybe in an import substitution project or export-oriented project, where banks are the vehicle to manage and nurture the investment whereas the promoters of the project had to infuse a nominal stake in capital, without having to mortgage the promoters’ personal assets.
Through this mechanism many professionals/entrepreneurs can be brought together for a common goal. Whilst entrepreneurs contribute by way of funds to acquire the shares in the company, similarly professionals can be allocated a certain amount of shares for giving up their current profession and committing totally for the project (opportunity cost). This will breed a new set of entrepreneurs strategically focused.
Hence, entire investment is rallied around the viability of the project. This will enable entrepreneurs to stretch their risk taking capacity and embrace high technology transfer to the economy. 
Further, the project will be of certain scale on par or in an even better position to meet the world competition and acquire a share of the world market without being limited to domestic demand alone. It is critical to disregard all locally provided import subsidies and the tariff barriers for related imports of these particular projects when the feasibility study is carried out.
Cashing in investments
Once the company is in commercial operations and starts making favourable returns, the bank as the main shareholder can seek for a listing in the CSE and cash in their investment as the exit strategy. Listing can be done either in the Main Board or the Diri Savi Board based on meeting the minimum criteria and this IPO will be hotly contested by the strategic investors since well over 50% of the stake is on offer.
Therefore, State-owned ailing institutes, closed up or struggling companies of importance can also be rehabilitated under this process, such as a paper milling company or a sugar manufacturing company or milk powder manufacture company, etc. Once these companies are turned around under private management, they will be listed in the stock market as a pre-condition to the arrangement. This will assist CSE market capitalisation with much better liquid stocks for investment.
What’s in it for banks?
What is in it for the banks? They can charge a nominal management fee to reimburse the cost of the human resources allocated, enjoy the preferential dividends (which are income tax free but subject to FS VAT) and enjoy the capital gains at the IPO with full tax exemption to it (proposed). Initial capital invested should be put back into the IFA for another cycle of investment after the IPO.
Recipe for success
The technical expertise, risk taking ability and business expertise of entrepreneurs and professionals and better financial and marketing guidance from bankers will make a good recipe for success.
Why don’t we revive the IFA for the foreseeable future for better economic development of Sri Lanka with a different outlook?
[The writer is a banker by profession with over 23 years in the financial sector with FCMA (UK), FIB (SL), MBA (UOC – Marketing), CGMA (USA), CCM (SEC). He can be contacted on [email protected]. This article contains the personal views of the writer and is in the interest of the nation.]
