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

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

- BY Anura Lokuhetty

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.

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:

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