Impact of Economic and Non-Economic Factors Affecting Loans in Sri Lanka

Research Proposal on

‘Impact of Economic & Non-Economic Factors which affect the repayment of Refinance and IFA Loans’

With Special Reference to Sampath Bank PLC

Prepared by

M.D.S. Jayasekera

(084064)

Department of Banking and Finance

Faculty of Business Studies and Finance

Wayamba University of Sri Lanka

Contents

1. Introduction        

1.1 Background of the Study        

1.2 Research Problem        

1.2.1 Research Questions        

1.3 Purpose of the Study        

1.4 Objectives of the Study        

1.5 Significance of the Study        

1.6 Scope of the Study        

1.7 Limitations of the Study        

2. Literature Review        

3. Conceptual Framework and the Research Methodology        

3.1 Conceptual Framework        

3.2 Hypothesis of the Study        

4. Study Design        

4.1 Approaches to the Research and Data Gathering        

4.2 Population and Sampling        

4.2.1 Research Period        

5. Plan of the Study        

5.1 Time Schedule of the Study        

6. References        

‘Impact of Economic & Non-Economic Factors which affect the repayment of Refinance and IFA Loans’

1. Introduction

1.1 Background of the Study

This study is expected to identify the “Impact of Economic & Non-Economic factors which affect the repayment of Refinance and IFA Loans” with special reference to Sampath Bank PLC. Many researchers in several other countries have undergone studies on this topic, but it’s hard to find out any research in Sri Lanka related to this topic, especially in the Banking Industry where there are many lending products from refinance and Investment Fund Account.

The IFA set up according to the guidelines of the Ministry of Finance and Planning comprises funds saved through the reduction of corporate taxes (from 35% to 28%) and reduction in VAT on financial services (from 20% to 12%). The IFA was introduced by the Government through the Budget for 2011 as a means of expanding the lending capacities of Banks, in order to meet the credit needs of key sectors that would stimulate the economy. On the other hand Small and Medium Enterprises (SMEs) received significant state support, with several credit lines allocated to revive specific industries and priority regions, especially the North and East. The Bank played a pivotal role in stimulating SMEs in the North and East, through the re-finance credit lines especially available for Northern & Eastern Provinces (Awakening North special loan scheme and credit line Resumption of Economic Activities in Eastern Province, KFWDFCC - V).

The loans which were disbursed under special credit schemes and IFA were low interest rate loans compared to other loan schemes of the Bank. The Bank was able to provide these special loans under concessionary rates due to low cost of funds of IFA and other special credit schemes provided by Asian Development Bank, World Bank, International Fund for Agriculture Development etc. through the Central Bank of Sri Lanka and the Ministry of Finance.

Even though the Bank provide low interest rate loan facilities out of the above mentioned funds, there seem to be a high rate of delay In repayment in most of the facilities disbursed. Sampath Bank has been able to keep the Non Performing Loan (NPL) rate at 2.4% in 2011. However the NPL rate of Refinance and IFA loans has taken a higher rate compared to Banks’ NPL rate. That is, NPL rate at 6.4% for IFA and Refinance Loans in 2011. Loan schemes which have higher interest rates have low NPL rate than the loans which have a low interest rate.

1.2 Research Problem

The Development Banking Unit of Sampath Bank is responsible for Refinance and IFA loans, which are low interest loan facilities than other loan facilities of the Bank. However the NPL rate of Development Banking is high compared to the Banks’ performance as a whole. What are the main reasons for this problem? Are those reasons economic factors or non-economic factors? Or both economic and non-economic factors influence the repayment of Refinance and IFA loans?

1.2.1 Research Questions

1. What are the impacts of economic factors such as interest rates, inflation, GDP, monetary policies, exchange rates and macroeconomic policies which affect for repayment delays of Refinance and IFA loans?
2. What are the non-economic factors which affect for repayment delays of Refinance and IFA loans?

1.3 Purpose of the Study

The main purpose of the study is to investigate the impact of economic and non economic variables which affect the repayment of Refinance and IFA loans and find solutions to minimize NPLs and repayment delays of Development Banking Unit (DBU). It will help to increase the performance of DBU and give a significant contribution towards Banks’ performance.

The following specific purposes also have been identified.

1. To identify the extent of effect of economic variables to Development Banking Unit.
2. To identify the extent of effect of non-economic variables to Development Banking Unit.
3. To identify solutions to minimize NPLs and repayment delays of Refinance and IFA loans.

1.4 Objectives of the Study

Major objective of the study will be to identify the impact of economic and non-economic factors which affect the repayment of Refinance and IFA Loans and give solutions to minimize the impact of each important factor.

1.5 Significance of the Study

The significance of the study is mentioned below from the organizational point of view, academic point of view and the society point of view.

Organization’s point of view

From the organization’s point of view, findings of this research study will be helpful to the top management to identify the major economic and non-economic factors which affect to the repayment of Refinance and IFA Loans and take necessary actions within the Organization to overcome the problem.