Under pressure from MSMEs, CBSL directs new measures by commercial banks

• Licenced banks permitted to reschedule credit facilities of eligible borrowers for a maximum period up to 10 years
• Required to set up Relief Banking Unit in addition to previously directed Business Revival Unit to help MSMEs
• Banks to establish transparent grievance-handling mechanism with respect to any dispute that may arise between bank and borrower on valuation of auctioned properties

The Central Bank of Sri Lanka (CBSL) has directed all licenced banks to establish a Relief Banking Unit to meaningfully help troubled Micro, Small and Medium Enterprises and Entrepreneurs (MSMEs), in addition to previous requirement of Business Revival Units. 

The latest direction was via Circular No. 01 of 2025 dated 1 January 2025. It also serves as an addendum to the previously issued Circular No. 04 of 2024 on relief measures to assist affected SMEs.

Licenced banks are required to establish a Relief Banking Unit for the purpose of extending and monitoring relief measures under the cited Circular for the effective implementation of such relief measures, while existing Business Revival Units established under Circular No. 02 of 2024 on Guidelines for the Establishment of Business Revival Units in Licenced Banks will continue for the intended purpose thereof, as per the latest circular. 

It also said licenced banks may reschedule the credit facilities of eligible borrowers for a maximum period up to 10 years, unless the original agreement has provided a period longer than 10 years, on a case-by-case basis, considering the repayment capacity of the borrower and an acceptable revival plan. In this regard, licenced bank and the eligible borrower shall agree on the terms and conditions, including the interest rates, considering prevailing benchmark interest rates.

Licenced banks are requested to establish a transparent grievance-handling mechanism with respect to any dispute that may arise between the bank and the borrower on the valuation of auctioned properties.

From 31 January 2025, banks are required to report details of relief measures granted to borrowers within 15 working days from the end of each month.

The new measures are following MSME complaints and criticism over the way the CBSL had responded following the Government decision mid-last month to extend the freeze of Parate action on defaulted loans. Some MSMEs viewed that the CBSL jumped the gun by issuing a circular (No. 04 of 2024 on 19 December 2024) before Parliament sanctioned the extension. It was alleged that the CBSL was keener to help banks than troubled MSMEs.

The MSMEs also made representation over their grievances to the Finance Ministry, which assured that proper relief will be given. 

In its 2024 Election Manifesto, the National People’s Power (NPP) promised establishing a Relief Bank to mediate and secure maximum support from financial institutions. The CBSL’s latest circular only refers to the Relief Banking Unit.

In response to the mid-December circular, Industry and Entrepreneurship Development Deputy Minister Chathuranga Abeysinghe told MSMEs that CBSL initiatives aim to provide relief to businesses with loans under Rs. 25 million, representing 99% of those affected by the debt crisis. “However, overcoming this challenge will require a collective effort from businesses, the Government, and the banking sector,” he added.

Salient features of the relief measures announced by the CBSL in mid-December were as follows:

a. Relief measures will only be applicable to credit facilities of SME borrowers of licenced banks that have been classified as Stage 3 (non-performing) on or after 1 April 2019, provided that SMEs initiate discussions with the bank’s Business Revival Units by 31 March 2025, subject to submission of all required documents.

b. Rescheduling of impaired loans for eligible SME borrowers will be based on the borrower’s repayment capacity and the submission of an acceptable business revival plan.

c. All rescheduling agreements with the borrowers are required to be finalised by 15 June 2025.

d. Eligible SME borrowers with an aggregate capital outstanding of credit facilities below Rs. 25 million, between Rs. 25 million and Rs. 50 million, and above Rs. 50 million as of 15 December 2024 are required to commence repayment of their rescheduled loans no later than 31 December 2025, 30 September 2025, and 30 June 2025, respectively.

e. Unpaid interest (excluding capitalised interest) on the credit facilities of eligible SME borrowers, applicable to the period from 1 April 2019 to 15 December 2024, may be waived as follows:

f. Licenced banks were informed to consider providing additional reliefs, including the granting of working capital facilities, to eligible borrowers, subject to the borrower’s repayment capacity and the submission of credible business revival plans, assessed on a case-by-case basis.

g. Licenced banks have been requested not to decline new loan applications from eligible borrowers under this scheme solely based on adverse CRIB records.

h. In the event of a rejection or dispute regarding the provision of reliefs, licenced banks were informed to make the borrower aware of the reasons for such rejection or dispute and to advise the borrower that there is an opportunity to appeal the decision to the Director of the Financial Consumer Relations Department at the CBSL.

i. Licenced banks are required to provide eligible borrowers with a breakdown of the capital, interest, and other charges of their credit facilities upon request.

The CBSL requested both licenced banks and concerned borrowers to effectively collaborate to ensure the consistent application of these relief measures. Accordingly, eligible borrowers are requested to contact the respective licenced banks with relevant information and documents to discuss and agree on repayment plans. Borrowers are expected to commence repayment as agreed with the banks, as non-repayment of loan obligations for a longer period would result in unwarranted strains on both banks and borrowers.