LIBERAL DECISION MAKING FOR CREDIT APPROVAL AND ADMINISTRATIVE DISCRETION
Posted on June 16th, 2020

BY EDWARD THEOPHILUS

President Gotabaya Rajapaksa reminded several times that banks must change traditional attitudes when granting financial supports to economic activities after the COVID backwardness. No doubt that the president wants quickly renaissance of the economy and the recession (negative economic growth) has become an unexpected experience in all countries. If the banking system of Sri Lanka strictly adheres to instructions of the traditional lending books it shall be difficult to reborn the economy that needs financial supports at this difficult moment. Think about the role played by Industrial Saibutzu during Meiji restoration in Japan, the way financial institutions contributed to the economic revival, and banks and non-bank financial institutions in Sri Lanka need to play an effective role for the renaissance (re-emerging) of the economy. It is not important who is in political power, banks and non-bank financial institutions need to play a critical role.   

Economic history gives evidence that the banking system had been worked with the government’s economic policy supporting the business and banks in many times had gone beyond the limits and barriers. In Sri Lanka, it seems that bank management is in a difficult situation to a quick change of attitudes as managers in a false mental condition. The instruction of President Gotabaya Rajapaksa is related to flexibility in the decision-making process and efficiency in service provision which means that banks should work like electricity when you switch on in the house, the light and power will come and when the switch off the power and light goes off. Banks need to understand this simple truth regarding efficiency and flexibility, which means that a heavy wind is blowing trees bend down and the wind goes away trees go back to the original position.

Why banks display reluctance to depart from the culture of traditional lending books is a question that should be critically evaluated. Since the 1970s managerial attitudes of banks have been changed and the experience in the banks has recorded that many customers in the past used this type of liberal opportunity to mislead banks and cheat financial supports. (Citi Bank’s experience in Hong Kong- Fat Game at Citi). The best example was the situation created after the July riots in 1983. When I was auditing banks found that certain dishonest few customers gained relief in millions from government banks than the total credit supports provided to rural agrarians in the country. Many dishonest customers were non-Sinhala businessmen and the entire life of such businessmen was cheating government banks. When lending supports become non-performance credits the audit process of banks blame decision-makers (credit approved authority) disregarding the advice of the government and flexible attitudes must be applied with due care and attention. Mr.Gotabaya Rajapksa explained his advice clear to banks and he wants to generate flexibility and efficiency in decision-making. 

The law of administration guides that if a public officer has used discretion in the decision-making process within four corners such decisions could not be challenged as an ultra virus and this legal provision could apply in a situation where the administrator can prove that the decision was within the four corners and was beneficial to the party, which was deserved to gain support.

The law of banking and the lending procedures are not subject to administrative justice in the law of administration, and the disciplinary actions of trading banks against credit approved managers indicate that many instances banks’ disciplinary procedures disregarded the principle of administrative law. It needs the protection of credit managers if there was no dishonest intention of managers when approving credits. If managers make decisions on good faith (with due care and attention) for economic renaissance it shall not be subjected to unreasonable litigation or disciplinary actions. Trading banks are subject to domestic (Central Bank) and international regulation (capital adequacy rule of Bank for International Settlements) and the capital requirements for various types of facilities insist by BIS.  The Central Bank of Sri Lanka should play its regulatory role on account of trading banks and a similar type of regulatory authority has given on all non-bank finance intermediaries in the 1980s by an amendment to the law.  The Central Bank should provide a re-finance support and credit guarantee where it is possible.

In this background, credit guarantee insurance would not be useful and think about the sub-prime mortgage crisis in the USA, and insurance companies in Sri Lanka might not able to accept the risk and compensate for in a situation business default credit repayment. 

The public statement made by the governor of the Central Bank in connection with a hire-purchase financing company echoed that the governor has a lack of understanding about trading banks and non-bank financial intermediaries. The governor of the central bank has been played a role as a university academic before assumed duties as the governor, and he did not work as a practically experienced person in banking and credit matters which involve complex legal, procedures, regulatory, accounting, collateral, and many other areas.  That is why he stated that hire-purchase companies are not non-bank finance intermediaries or not registered with the Central Bank of Sri Lanka. The statement of the governor indicates that hire-purchase companies in Sri Lanka could be established without the approval of the Central Bank.  It is a serious lapse of the financial regulation in the country and why competent officers of CB did not advise this situation to the monetary board to revise the existing regulation?

When I was working in a government trading bank I concerned the regulatory matters of the financial sector.  I can recollect that when my bank authorized to grant credit facilities against NRFC balances I informed the governor of the Central Bank that the trading banks’ decision would impact increasing inflation of the country and when Mr.JR.Jayawardane wanted to get foreign exchange more than the legally entitle amount to a citizen I refused it on the normal procedure and Mr.Jayawardena understood my explanation. 

All non-bank financial intermediaries including hire purchase, mortgage, leasing, and all other types of financial activities based on contracts or agreements which are involved with two or more parties must register with the Central Bank and the regulatory process of the Central Bank must be covered the operation of all these intermediaries. The problem, in this case, was the Central Bank has not been played its role or it should have different regulatory institutions under its leadership like in other countries.

Banks and financial intermediaries use various types of agreements when financing for various purposes. A hire-purchase agreement means it involves two parties, financier (the owner or hirer) and the hiree (the person who obtains finance to purchase the vehicle) and the office of motor vehicle registration indicates in the registration book financier as the owner of the vehicle but not the person who obtained finance facilities to buy the vehicle.  After full payment of the loan, the financier advises the Motor Vehicle Registration Office to change the owner of the vehicle.  If the customer defaults repayment the loan the lender has the right to cease the vehicle. In Sri Lanka, non-bank financial intermediaries use crude techniques to cease vehicles.  My feeling is the financier has to go the court and get an order to cease the vehicle rather than using the violent techniques. Trading banks use the technique going to the court but many non-bank financial intermediaries use violent techniques that are subject to criminal justice.

According to my experience, Bank of Ceylon first used a hire-purchase agreement to provide financial facilities to purchase tractors to productivity committees in the 1976 and used a successful strategy to ensure the repayment of loans, rather than using violent techniques to cease tractors.  After 1978, the bank widely used hire-purchase contracts to provide finance facilities to purchase motor vehicles, trucks, and other types of vehicles that imported to the country under the market economic policy.                      

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