PRIVATIZATION OF GOVERNMENT BANKS AND THE REQUIREMENT OF REFORMING THE MANAGEMENT OF BANKS
September 12th, 2019BY 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)







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