PRIVATIZATION OF GOVERNMENT BANKS AND THE REQUIREMENT OF REFORMING THE MANAGEMENT OF BANKS
Posted on September 12th, 2019

BY EDWARD THEOPHILUS

Privatization of government owned banks has been an issue in Sri Lanka since early 1990s and many have no idea why the issue was emerged at that time, and it seems that now the issue has involved in politics rather than considering the facts  related to the requirement of privatization or popularly called expanding the ownership of government banks.  Why this issue emerged in an inappropriate time in the country, where is preparing for elections, is difficult to understand and the government had plenty of time since 2015 to openly talk about the issue and educate people on the issue. The management of banks in Sri Lanka had been associated with many problems since beginning of the organized banking system in the country in 1800s and the appointing a banking commission in 1930s was the best example to such problems. However, the recommendations of the commission did not solve the issues and the problems in relation to the banking and banks management in the country expanded to the future. The major recommendation of the Pokkanavala Commission or popularly called the Banking commission supported to establish Bank of Ceylon with a private and public partnership, the ownership structure was changed when Mr. T.B.Illangaratne was holding the portfolio of Finance and new trading bank called People’s Bank under the fully ownership of the government was established during the tenure of Mr. Illangaratne. Banking has considerable problems in many countries worldwide and it doesn’t want to involve in petty politics and the problems relation to the management of banks need to consider independently.

Late 1980s I participated in an exercise of risk assets review in (Corporate and Medium Market) Bank of Ceylon with consultants of the World Bank and found large scale misuse of bank loanable funds by bank executives granting credit facilities to customers who had no credit quality.  Based on findings I drafted a credit policy manual for the bank and don’t know whether the manual is operative at this time. I also advised to develop risk assets acceptance criteria for corporate and medium market and gave the structure of criteria, I don’t know whether successfully done the job. We also developed a case study named Contrite Contractors” to train credit officers. When the COPE discussion was going on about the audit report of People’s Bank, it revealed that the banks in Sri Lanka is still providing credit facilities for contrite contractors restructuring facilities have not settled within the framework of extension.  The bad debt level of the bank had been in a higher level compared to the level of trading banks in other countries and the accounting practice of the bank was not consistent with international practices.  If the identified bad credits were written off at that time, the net worth of the bank would have negative and as the owners of the bank, the government had not abilities to allocate funds from the annual budget to recapitalize the bank. The corporate and executive management had not understood what should do to reform the management of bank and most of them were dices of political chess board.

When I was watching the program of government committee (COPE) about People’s Bank, I was surprised about the management style of government banks and it was reflected the stupidity of bank management using loanable fund and observed that politics and political influences are destroying the public financial institutions. The chairman of People’s Bank mentioned capitalization issue which is the major issue of the banking system in Sri Lanka, but he did not elaborate the issue people to understand the problem, which was unable to convince people the nature and the size of the problem.   Chairmen and the board of directors of government banks have no idea what is the role of them as top managers and they are working like cheeky monkeys or children playing with the capital of the government and customer deposits.  Chairman of the COPE committee was talking about customer deposits   and he never talked about government capital, which is owned by public in Sri Lanka. The COPE chairman should have explained the problem with a broader study of the issue to public as people of the country was observing what was going on.

The major issue of banks in Sri Lanka is difficulty to maintain required capital level (combine of Ordinary Shares, Preference Shares, Convertible Notes, Retained Earnings, General Reserves, Minority interests in Subsidiaries, Provisions, Subordinated Debt, Perpetual Floating Rate Notes etc) for individual operations.  In early 1980s Bank for International Settlements insisted to maintain capital adequacy based on risk adjusted assets (Capital / Risk adjusted assets) and this international regulation pressed the banking system in Sri Lanka to maintain capital requirements with a view to demonstrate the international standards.  The depreciating the domestic and foreign value of Sri Lanka’s monetary unit with the introduction of market economic system in 1978 clearly created a monumental demand for credits in the economic system.  To satisfy credit customers, banks had problems without sufficient capital and liquidity, and increasing non-performing credits in banks due to various reasons (Especially credit frauds, granting credits on  political influence, Fat game at Citi style frauds in Hong Kong Citi Bank, unmitigated corruptions in government banks and ignorance of bank management) created the capital crisis.

Capital crisis had many banks in the world after ending cold war in early 1990s, some banks were closed and many banks were rescued by using various techniques and managerial strategies. For example, many banks in Australia in early 1990s had tremendous problems, using a variety of techniques (Making right issues, offering shares for capital, privatizing government banks, merging banks etc) the banking system was rescued and now banks have prudent management policies. Capital crisis of bank must be solved educating people because bank employees and ordinary people of Sri Lanka have no idea about this issue and when I tried to settle the problem, I was threatened in late 1980s.

The most important point is that there are plenty of strategies to resolve the problem.  However, in early 1990s the government attempted solve the problem using stupid method and it would have the style of Arjuna Mahendran or Paskaralingam or any non-Sinhala solution but they were stupid and banks need finding a permanent and acceptable solution to the people.  There are active strategies for capital problems.

  • Obtaining loan from international financial institutions offering shares of banks to the value of loan amount and the condition of the loan should be share buy back by each bank using annual profits and gradually taking the ownership of banks to the government.  The use of this method would help to learn management strategies under the guidance of international financial institutions.  This also supports for disciplines in bank management.
  • Offering bank shares to insurance and superannuation organizations in the country and implementation of share buyback.
  • Offering shares to small domestic companies and rural people to expand to share ownership to rural poor.
  • Offering shares to deposit holders of the bank and reducing the cost of interest expenses.  This strategy will increase the profitability of banks and increase the ability to share buyback. And ensure the rights of minority shareholders of banks.

Privatization of public bans creates high risk to the government of Sri Lanka because it could use to control the government policies as well as to money laundering purposes.  Therefore, lateral thinking about the privatization program is vital.

Sri Lanka desperate for capital and because of this condition the country should not get caught to robbing banks programs.

(Next I would like to write on liquidity issue and issuing relating to credit management)

One Response to “PRIVATIZATION OF GOVERNMENT BANKS AND THE REQUIREMENT OF REFORMING THE MANAGEMENT OF BANKS”

  1. Ananda-USA Says:

    This comment is off topic, but it is important that we understand why President Sirisena moved Rupavahini under his Defence Ministry.

    The following article may shed light on his decision to do so.

    ……………………………

    Rupavahini chairperson explains Defence Min. take-over

    DailyNews.lk
    Friday, September 13, 2019 – 01:06

    By Camelia Nathaniel

    Instead of trying to find fault with President Maithripala Sirisena for having gazetted the Sri Lanka Rupavahini Corporation under the Defence Ministry, it is important to take note of the incidents which compelled the President to take this decision within a few hours, said the Chairman of the Sri Lanka Rupavahini Corporation Inoka Sathyanganie Keerthinanda.

    Addressing a media briefing at the SLRC premises yesterday together with the Director General of SRC Saranga Wijeratne and senior management she said during the period the SLRC was under the Cabinet Minister for Media Mangala Samaraweera the heads of five state and semi-state institutions were appointed, namely, the Associated Newspapers of Ceylon Ltd (ANCL), Rupavahini Corporation, ITN, Salacine and SLBC.

    Inoka Sathyanganie Keerthinanda was appointed on May 17th, 2018, as Chairman of the Sri Lanka Rupavahini Corporation after her name had been approved by the three member committee that had been appointed to approve these posts and the committee having deemed her qualified and suitable for the post.

    However, after the political coup in October 2018, while the heads of several of these institutions had been asked to hand in their resignations, she and two others had not been asked to resign. Thereafter, once the government was re-established she was re-instated in her position on December 22.

    “There is so much of false information regarding this incident being spread. But this false information is not just affecting me personally, but it affects the over 1200 staff, management and most of all it is tarnishing the image of this prestigious state institution. This institution has an illustrious background. If its reputation is being tarnished by such false information, it is our duty as the heads of this institution to come forward and reveal the truth and safeguard this institution’s reputation,” she said, adding that this media briefing was not intended to sling mud at anyone.

    Explaining the incidents which had led to this issue at SLRC the Chairperson said that after Non-Cabinet Minister Ruwan Wijewardena was appointed as the Media Minister, it is generally customary that the former minister makes requests to the heads of institutions asking them to step down. “However, the Chairmen of ITN Tilaka Jayasundara, Lake House Chairman Chrishantha Cooray and herself had not been instructed to hand in their resignations. Hence there was no resignations for them. Then after Minister Ruwan Wijewardena had taken office, he had appointed another Chairman to SLRC while I was still serving. In fact, he did not appoint him and send him, but had sent his recommendation to the committee and this committee had not approved.

    “First Sanjeewa Wijegunawardena had been recommended to the committee for the post of working director by Minister Wijewaardena, the committee rejected his nomination based on the provisions of the SLRC Act. Then, last Friday, we came to know that another person, the current Working Director of SLRC Kelum Palitha Mahiratne, had been appointed as the Chairman. When he had presented his letter of appointment to my office, I tried to contact the President and find out if such an appointment was approved, as none of us were aware of this move. I received a message from the President that he was not aware of this appointment. Then I spoke to one of the Committee members and he too said he was not aware of such an appointment. Then, I spoke to the Media Ministry Secretary Sunil Samaraweera in the presence of my DG and Administration Director and, the Media Ministry Secretary too said he was not aware of the appointment. Hence, there was no legitimacy to the appointment letter that was brought by this newly appointed Chairman and therefore, I did not leave my post and continued to carry on my duties in my office.”

    She added that Mahiratne had then threatened the Rupavahini staff and forced them to type a letter for him and he and several others who had accompanied him had occupied the Board Room. “Thereafter, he had got a letter head and typed a letter on it that he had taken over as the Chairman and forced her secretary to fax the letter to the Media Ministry. This is what my staff told me. I advised them to seek advice from the DG as I was not in the office at the time. I don’t know where he got the letterhead from and I have it with me as I might need it in the event I have to produce it in court or the Government Analyst. It was after the fax had been sent that the Media Ministry Secretary came to know of his appointment. After around 2-3 hours of being in the Board Room they had left.

    “This happened on Monday and after they left and as this appointment could not be accepted as it was illegally done, we notified the security personnel not to allow any outsiders in. Then again they returned with another group of persons and had threatened the security as well. By then, we had notified the STF head DIG Lathif as well. When they were becoming more hostile, I notified the DG and then on his advice, we notified the President’s office regarding the incident. We were also notified that the Media Minister was also on his way.”

    According to the SLRC Chairperson, after the President was notified, that evening, the President had issued a special gazette and taken over the SLRC under the Defence Ministry. She added that all the CCTV footage of the incident and the letter etc is all kept safely in order to be produced at any time to prove who was wrong. She also noted that during the time Minister Mangala Samaraweera had held the post, they had no interference or pressure and could work freely and independently.

    Refuting allegations by the Media Minister that SLRC was an institution which is falling in its ratings, she said since she took over the ratings of SLRC had moved from 8th place to 6th place. Further, she said that under her command 32 programmes had been planned for SLRC and already 15 of them had been implemented and is operational

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