When banks prosper but SMEs perish: A question of fairness in SL’s recovery

BY Anura Lokuhetty

Sri Lanka’s post-crisis recovery narrative contains a growing contradiction that demands national attention. 

While the banking sector has reported exceptionally high profits in recent years, a large segment of small and medium enterprise (SME) borrowers—particularly in tourism and other foreign-exchange-earning sectors—are being pushed toward liquidation. 

This is occurring not because of mismanagement or weak business fundamentals but due to a succession of man-made and natural disasters beyond the control of the borrowers, compounded by rigid financial practices that now threaten long-term economic recovery.

This is no longer a series of isolated borrower-bank disputes. It is a systemic national issue.

Borrowing in good faith, undermined by national calamities

Between 2015 and early 2019, many Sri Lankan SMEs borrowed—often in US dollars—to invest in tourism and related sectors. These loans were not speculative. They were approved by the banks based on formal feasibility studies, projected cash flows and acceptable debt-service coverage ratios. At the time of lending, these projects were deemed viable, bankable and aligned with the national development priorities.

Importantly, many of these borrowers serviced both capital and interest regularly until April 2019, when the Easter Sunday attacks abruptly collapsed demand.

What followed was not a normal business cycle:

• The Easter Sunday attacks destroyed confidence overnight
• COVID-19 shut borders and businesses for nearly two years
• The economic crisis escalated interest rates and currency exposure
• Repeated natural disasters disrupted fragile recovery

No prudent business model—however conservatively structured—could have absorbed this sequence without distress.

When “non-viability” is created, not inherent

A particularly troubling trend has emerged in recent times: the banks now classify many of these SMEs as “non-viable”, using this designation to justify aggressive recovery action and parate execution.

This position is fundamentally flawed.

These same banks approved the original loans after assessing the feasibility and viability. Many borrowers performed in line with the projections and met their obligations until the nationally recognised shocks intervened. What rendered these projects “non-viable” was not business failure but the external shocks imposed after lending.

For the US dollar-denominated borrowers, viability has been artificially destroyed by financial mechanics rather than operational performance. Since the time of borrowing, the Sri Lankan rupee has depreciated by nearly 120 percent, dramatically inflating the outstanding loan balances in rupee terms. Simultaneously, the banks continued to levy interest and capital charges during the moratorium periods, compounding debt even when the businesses were legally or practically unable to operate.

A project cannot reasonably be labelled non-viable when:

• It was bank-approved as viable at inception
• It serviced debt until national calamities occurred
• Its balance sheet was distorted by currency collapse beyond borrower control
• Its debt escalated due to interest accumulation during enforced shutdowns

True viability must be assessed on normalised operating performance and forward recovery potential, not on distorted post-crisis balances. Anything less is not prudent credit assessment—it is convenient justification for enforcement.

Moratoriums in name, not in substance

While moratoriums were granted during crisis periods, their structure often resulted in:

• Interest-on-interest accumulation
• Capital repayment compression into later years
• Multiple loan restructurings that inflated overall exposure

As a result, many SMEs today face outstanding balances disproportionate to the original loans, despite having serviced facilities responsibly until the first national shock.

This has converted temporary relief into deferred distress.

Record bank profits, rising SME distress

During this same period, Sri Lanka’s banks recorded historically high profitability, driven by widened interest margins, exchange gains on US dollar lending and balance-sheet optimisation.

The contradiction is stark: How can the banks prosper so significantly while the SME borrowers—who generate employment, regional development and foreign exchange—are driven toward liquidation?

From both an economic and financial-stability perspective, this approach is unsustainable.

Parate action: A blunt tool in a fragile recovery

The increasing reliance on parate execution against the calamity-affected SMEs ignores economic context and destroys long-term value. 

Forced auctions during a recovery phase:

• Depress asset prices
• Eliminate jobs
• Damage rural and regional economies
• Reduce recovery even for the banks themselves

This is not prudent banking. It is short-term enforcement at long-term national cost.

What responsible banking must look like now

This is not an argument for debt forgiveness or indiscipline. It is a call for context-aware, responsible banking aligned with national recovery priorities.

What is urgently required:

• Formal recognition of calamity-affected SME borrowers
• Genuine restructuring, not cosmetic rescheduling
• Rationalisation where interest accumulation has distorted balances
• Transparent engagement and timely responses to restructuring requests
• Clear regulatory guidance to ensure fairness and consistency

The banks must be seen not only as lenders but as partners in national recovery.

A national economic responsibility

Sri Lanka cannot rebuild its economy by eliminating those who invested in good faith—encouraged by national policy—just as recovery begins. The cost of widespread SME failure will be borne not only by the borrowers but by employment, rural livelihoods, investor confidence and long-term financial stability.

Recovery must be shared. Responsibility must be collective.

(Anura Lokuhetty is a senior hotelier with 47 years of experience in Sri Lanka’s tourism sector and a long-standing advocate for responsible, inclusive economic recovery.)