THE DEBT RESTRUCTURING CONTROVERSY IN SRI LANKA
Posted on November 28th, 2022

BY EDWARD THEOPHILUS

The information on the debt restructuring of Sri Lanka shows that it has become a serious controversy among many people, despite this situation ordinary people in the country have no idea about the controversy. Some information publishes in the media and much of them have limited to policymakers. As the process of restructuring involved diverse organizations which provided debt facilities to the country with different objectives and some organisations have been involved with the process with strange conditions which cannot disclose to the public and insist on various conditions that may not be justifiable and understandable to people the impact of a restructuring process.

Many debts related to development activities and some items allowed politicians and bureaucrats to gain direct and indirect financial advantages, which were part of loans and ultimately become liabilities of the country.   The controversial factor relating to the process is how was used the proceeds of debt and what kind of credit monitoring process was applied by the credit providers. Were there unacceptable commission deals involved with the process of granting credits and what were such covenants used in the original process may be the question to people of the country? For example, under the credit condition, there may have been a requirement to purchase items of which prices may have been higher than the prices of the open market and in such a situation Sri Lanka would have suffered more than the use of credits.

If credit providers strictly monitored the use of funds it would not be subject to default and monitoring the related reinvestments productivity of credits would have resulted in the economy. Many credits were granted to Sri Lanka ignoring the benefits of the country as a support to the producers of the credit-providing country. When talking on this side it reminds us of the international talking points in the late 1960s that credit to developing countries was in fact, support to people in credit providers than supporting poor people in developing countries.    

The other significant point that needs to be considered is whether the proceeds of loans have gone to pockets of individuals and if it happened how that process workout by lenders and how to recover such corrupt funds. Did there any politicians or government officers involve with such corrupt practices and if so how to recover such corrupt funds from individuals who were associated with corrupt practices? Lenders also had objectives that were related to their business activities.

The purpose of the restructuring process should be for Sri Lanka to help with repayments of credits and the elimination of particular corruption that incurred against Sri Lanka,  but people have no idea about them.

Debt restructuring has been in trading banks in Sri Lanka since the late 1970s for past due customers and restructuring was a remedial management strategy. Debt payments were not a grave issue in the banking system before 1970 because banks were extra-careful in granting credits at that time, corrupt practices of bank management were limited and managers were scared to associate with corrupt practices that motivated borrowers to default repayments. Strong criticism against credit assessment came when the malpractices of bank managers when they ignored many points from the borrower’s side and approved credits were a part of the bank-customer relationship.  There were stories that no proper methods were used by bank managers in the credit assessment process and structuring the credits with essential covenants and granted credits. If the bank manager was given a 10% commission by the borrower at that time loan was given without covenants. These facts were known to top management, which also accepted either bribery or hampers from customers.

The restructuring of cultivation loans of farmers wanted field evidence. Trading banks had an arrangement with the Central Bank for credit guarantee and refinancing. In 1972, the central bank provided strong support to trading banks to encourage financing for development purposes and a refinancing system in which the Central Bank provided funds as loans to trading banks to maintain liquidity and reserve requirements. Later, such support was withdrawn by the Central Bank and the restructuring of credit conditions became a strategy in credit monitoring and remedial management. These management strategies were not successful due to two reasons one was bank officers were dishonest and allowed borrowers to use funds whatever the purpose disregarding the purpose of original credit.   

In 1983, the experience of destruction caused to increase in heavy defaults which incurred the result in setting fire to firms, and bank managers who were wearing clean suits became crooks to the banks as well as customers by cheating in credit quality assessment and credits were granted taking 10% with commissions, which had to transfer to past-due section. This situation led to restricting debts. The world bank and international development association assisted trading banks in restructuring debts and this process was also used to gain advantages by certain bank executives. IDA consultants introduced a five pillars credit quality assessment which included credit restructuring too.

The restructuring process involved various conditions such as issuing new shares to increase capital volume, appointing bank officers to the defaulted company board and many others. The credit restructuring that subjects to government debt restructuring with other countries and international institutions may complicate with different covenants that would be discordant to the country.     

Although it was believed the restructuring of private debt should be restructured by the government, the present situation in Sri Lanka shows that the proposed restructuring should be applied to all debts in the government and private sector.

Strict conditions need to apply for the restructuring and it needs to disclose conditions and why such conditions insisted be explained to the public. There is no justice if the public will be suffered in the new conditions because they never got any benefits from the original credits.

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