WHAT ARE THE REASONS FOR A HIGH-RISK BANKING MARKET IN SRI LANKA?
Posted on October 17th, 2021

BY EDWARD THEOPHILUS

I read an interview had with Mr. Lakshman Silva, the chairperson of Bankers Institute, wherein he described the banking system in the country as in a high-risk situation. What factors have been contributed to the high risk not described, but two points mentioned were the low economic performance of the country and foreign exchange shortage. Economic performance fluctuates in any country, if it investigates the economic history of past three centuries it would reveal that many economic fluctuations incurred, and the COVID-19 pandemic harms many countries where economic managers can nothing to do against the pandemic, the nature of the pandemic is it forces lockdown and reduce economic activities. It could be interpreted as an economic downturn or a recession (Negative Economic Growth). No country will make a public statement that it is in a recession, as it will harm the economy and wipe off the value of the stock market. He did not explain the reasons for risk in the banking system. This subject had been broadly studied since the late 1980s and effective steps have not been taken by the market authority and allowed continuing the problem. This is the major reason for generating a higher risk in the banking market.

The Central Bank of Sri Lanka issued banking licenses when they were not needed. Sri Lanka needed to encourage merging banks to establish a Large Bank for holding assets. When the country needed reducing the players in the market, what the central bank done was done was creating more players and put the banking market to glut risk situation. The second factor that contributed to market risk was many government finance organizations allowed for lending businesses commissioned by the Central Bank. The Central Bank has many economists, why they allowed to create a high-risk environment despite the fundamental role of the Central Bank. Why did the National Savings Bank was given authority to perform trading bank functions in the absence of critical consideration of many points? An executive of the National Savings Bank who was in a trading bank had an interest in performing trading baking role to show off his merits, but it was misguided advice. The role of the National Savings Bank would have provided supports to the government providing funds for investing treasury bills by saving money in the National Savings Bank, and absorbing excess money in the market. They were some reasons to create risk in the banking market.

The Central Bank issued banking permits to several executives who retired from the government banks. The finance environment was higher inflationary and to react against inflation needed policies to reduce money in the market, but the retired executives wanted make places to find lifetime jobs. I wrote to the president of Sri Lanka not to entertain these people and harm financial system in Sri Lanka.  

In the early 1980s, International banking regulation was introduced by the Bank of International Settlements (BIS) to maintain risk-weighted capital adequacy in individual banks, and later this regulation was introduced to finance companies too by the Central Bank of Sri Lanka. If this regulation is being maintained by banks, they would not relegate to risk situations because banks have sufficient capital to write off bad debt, which is unrecoverable after litigation and realizing the collaterals. If bank managers have taken the wrong decision and dishonest decisions, there may be created high-risk credit portfolios. That was the major reason to create high environment. The nature of Sri Lanka was looking for loopholes in the system rather than proper compliance to reduce the risk in the market. To prevent this situation, banks were introduced a credit audit process and a strict bank supervision process by the Central bank. After 1990, these strict regulation measures were abandoned and politics invaded the bank operations.

If the chairperson of the Bankers Institute makes a public statement that banks in Sri Lanka are in a risky and uncertain condition, he should have given reasons or submitted data to support his statement. How credit portfolios contain intolerable risk, which is neither the responsibility of the government nor the negligence of customers, the bank management needs to maintain compliance and protect the banking system from intolerable risk. Since 1990, banks were encouraged to develop credit policies that were neglected by political friends appointed to bank management.

Banks in Sri Lanka do not respect BIS regulation, and current risk could be avoided by increasing the capital contribution. The current economic condition would not allow the government to contribute a massive volume of budget spending for capitalising on government banks. Don’t forget the stupid decision made by when Mr.R. Premadasa was president. How did he capitalise government banks and most probably Paskeralingam given advice to the Central Bank to make stupid decisions?  The best option is to allow 25% of capital to be contributed by foreign investors and 25% of capital should be contributed by local investors and Sri Lankan who are living in overseas. Then 50% of new capital comes into the banking system and the shortage of capital crisis will be solved easily. Besides bank capital, nearly US $500 million to one billion come in and it would solve foreign exchange shortage. The risk level of the banking system will be eliminated.   

It is not selling government assets, it can include a condition to buy back shares and many of the shares could be given Sri Lankan living overseas. That is how can reduce the risk in the banking market.  

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