WHAT ARE CREDIT IRREGULARITIES AND HOW THEY ARE DETERMINED?
Posted on July 5th, 2020

BY EDWARD THEOPHILUS

A recent statement of the Prime Minister, Mr. Mahinda Rajapaksa after meeting with executives of Ceylon Bank Employee’s Union regarding the investigation on the irregular credits of government banks during the Yahapalana Regime, expressed that the government is willing to appoint an investigation commission to consider the irregularities incurred in credit approval of government banks.  It is a vital action, however, many former bankers in state banks have a question why this investigation limits to the period of the Yahapalana Regime, and why couldn’t extend further covering from 1978 to 2019. The investigation of credit irregularities in government banks is not limited to a political issue, but it is an issue to entire bank management and concerning issues for maintaining viable credit assessment in the country. In early 1990 decade credit approval was a serious issue in government banks and the weak management forced the owner government to allocate a large volume of budget funds to increase capital of government banks as the failed credits was written off from the bank capital, banks supposed to come to a negative net worth. This issue impacts the payment system of the country.

During 1978 – 2019, many credit irregularities recorded in government banks and whether they were politically motivated or dishonesty of credit management in government banks are critical questions to be investigated by a commission. Sometimes, members of Ceylon Banks Employees Union may have involved in the credit irregularities and it might reveal that CBEU in some instances acted to protect members who participated in irregular activities than considering justice to the country.  Many bank employees are of opinion that CBEU protected only the favourite members of the union and the management.

There may be evidence that corrupt executives of government banks protected credit officers and managers who were members of CBEU.  If the government appoints a commission it should be covered a broader area and independent members, knowledgeable and competent members should be included to the proposed commission.

Credit irregularities in government banks have done damages to the economy as well as to the structure of government banks.

I participated in a risk asset review in corporate lending and retail lending in branches.  The following are irregular activities detected.

  • Approving credit on the request of politicians without assessing the creditworthy of customers
  • Approving credits to friends, relatives of bank management without assessing the customers quality
  • Approval of credits taking commission or bribery from customers and such actions were not involved, politicians
  • Some credit officers approved credits to customers without properly assessing credit proposals
  • Credit officers who approved credits were not properly trained by the banks to assess customers credit quality (Industry environment, Competitive position, collateral quality, credit structuring, and credit distribution covenants
  • Credit officers approved credit without the knowledge of accounting, for example, millions of credits granted to customers who had paid up-capital only Rupees 100 but the authorized capital was billions.  It was a cheating
  • Some customers financial statements indicated that money was given to credit officers and such money indicated as expenses in the income statement
  • Bank managers must daily match the volume of deposit and credit balance to protect from the potential liquidity problems and without doing this practice, credits were approved and the banks faced to liquidity problems and had to borrow from overseas to settle the problem.

Above were only a few irregularities, but many were recorded.

Failing credit repayment is natural in any country, however, credit management in government banks treated these issues as simple matters, and some dishonest managers were sent to overseas branches and honest managers were discriminated.

These issues need to investigate and develop policies to protect government banks.  

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