{"id":107338,"date":"2020-10-07T00:23:22","date_gmt":"2020-10-07T06:23:22","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=107338"},"modified":"2020-10-06T17:20:51","modified_gmt":"2020-10-07T00:20:51","slug":"advantages-of-understanding-bank-credit-policies-to-avoid-problems-in-the-finance-sector","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2020\/10\/07\/advantages-of-understanding-bank-credit-policies-to-avoid-problems-in-the-finance-sector\/","title":{"rendered":"ADVANTAGES OF UNDERSTANDING BANK CREDIT POLICIES TO AVOID PROBLEMS IN THE FINANCE SECTOR"},"content":{"rendered":"

BY EDWARD THEOPHILUS<\/strong><\/em><\/span><\/h2>\n\n\n

A few months ago, the country-wide\nhighlighted problem that was directed to the president was difficulty in\nobtaining credit facilities for the small business sector and neglecting small\nbusiness communities by organized banks in the country. The issue has been\nwidely discussed by bankers as well as policy-makers of the country.  The issue is a pressing question to all\ncommunities and it is not a question quickly emerged but it is a question\nexisting in the country since the early 1990s. the budget speech in 1970,\nDr.N.M.Perera highlighted the issue and later the government directed several\npolicy actions, despite numerous efforts to solve the problem it is continuing\nin the country for more than a century. Why this situation and who is\nresponsible to expand the problem? <\/p>\n\n\n\n

Historical perspectives of trading\nbank operations provide evidence that bank credits have been playing a major\nrole in capital formation and investment acceleration in developed and\ndeveloping countries during the past century. \nInvestments in the USA, UK, and Australia had been boosted by bank\ncredits after wartime massive backwardness. Bank credits yielding a high level\nof profits to banks, thereby generating billions of tax revenue to the\ngovernment. American researchers in the early 1990s on the secret behind the\nmassive Japanese economic achievements have revealed that lower cost of capital\nmanipulated by bank credit policies in Japan gave a big push for investors to\nbroaden their manufacturing base and encouraged investors to make more\ninvestment through borrowing from banks. \nJapanese corporate management practices engineered the own for large\ncorporations to create credits for debt capital and working capital. The entire\nfinance sector became family trees of banks. <\/p>\n\n\n\n

Banks are a vital source of capital\nfor investors all over the world especially, when the share capital is not\nsufficient to entertain the demand of credits, and especially, in Sri Lanka\nbanks positively responded to the business sector providing credit supports to\nmeet the demand. The mentality of the business community reflects that\nconsumers don\u2019t satisfy with the actions of banks.  The nature in Sri Lanka, despite the concept\nof market capitalization, small and medium investors contrive the short and\nmedium-term capital requirements from the banking system, and late 1990s in\nAsian countries, trading banks were severely pressurized by credit demand and\nthe concept of Asian saving should be invested in Asia through Asian bond\nmarket came to bruit in the region. \nAlthough the role of banks has reduced in the process of proving finance\nfor business in developed countries the task of capital formation seems to be\nchanged in Sri Lanka, it could be observed that large and small business\ncommunity are always going to banks seeking credit supports.  <\/p>\n\n\n\n

There is little evidence in Sri\nLanka that understanding credit policy has assisted in engineering required\ncapital for business. Sometimes ago when I was working in a manager position in\na regional Sri Lanka, I considered that credit risks of the bank could be\nmassively reduced by education bank credit policies to customers and\ncoordinated the policy process between the bank and business community using\nappropriate strategies to educate the business community, the strategy was\npractically successful. The explicit nature in the current bank management is\nthe details of credit policies are not disclosed to customers and in many\ninstances and customers made hostile responses against banks and in such a\ndifficult situation using unacceptable methods or dishonest strategies to\nfulfill the requirement. <\/p>\n\n\n\n

Credit policy development was a\nstrange management practice bank operations and even bank executives in the\npast were lacking the knowledge of management strategies regarding credit\npolicy developments and some operational procedure that was set in various\noperation manuals, in many banks in Sri Lanka operation procedures were compromised\non the British management procedures, which had been relied on common law\nevidence on conventional banking practice. American and Japanese banks departed\nfrom the British conventional praxis and manipulated their systems.   Many top bank executives in government banks\nin Sri Lanka did not know about bank credit policies which were set on a\nbroader spectrum such as accounting, economic, law, and many other conventions.\n<\/p>\n\n\n\n

The policy role until the\ninitiation of policy development in 1989 with the support of Booz, Allen, and\nHamilton was a neglected area, but essential to maintain a healthy financial\nsystem to stay in a fluctuating environment in a liberal economic system.  Many banks in Sri Lanka considered that the\ndevelopment of management policies for various functional areas such as\ncustomers accounting performance, credit administration, asset and liability\nmanagement, liquidity management, asset quality management, and relationship\nmanagement would be a partial role of the Central Bank, and trading banks have\nno participative role in it.  This\nmentality has been supported by the ownership of major banks in Sri Lanka (the\ngovernment).  The regulatory role of the\ncentral bank ignored the encouragement or making regulation congruous of the\nmarket dynamism and diversity brisked in limited functional areas of banks.<\/p>\n\n\n\n

Since the 1990s banks in Sri Lanka\ntrading banks especially focused on policy developments, such efforts were\noutweighed the political influence (since 1978, government politicians\ninfluenced the bank management for credit decisions) as the government policies\nattempted to hold the power of controlling institutions due to several reasons such\nas borrowing for covering the budget gap, providing employment, entertaining\npolitical henchmen, investment in public corporations and many others.<\/p>\n\n\n\n

Since early 1990, Sri Lanka has\nbeen recording the highest number of failures in non-banks financial institutions,\nand the Central Bank directed policy development for trading banks. The liberal\neconomic system encouraged more imports without discipline and customers jumped\nto non-bank financial institutions for borrowing to purchase imported vehicles\nand many other items. The burden of credits in the country did not distribute\namong the banks and non-bank financial institutions.  Bank customers did not understand bank credit\npolicies, and non-bank financial institutions became more liberal credit\nproviders considering making profits from the liberal credit market.  The worse result of the shifting customers from\nbanks to finance companies was the lack of protection for deposit holders in\nnon-bank financial institutions.  <\/p>\n\n\n\n

The volume of non-performing\ncredits in the financial system in the current market is more than 10% of the\ntotal credit portfolio and this reflects the unprofitability of trading banks\nand rising costs for litigation of customers and recovery efforts. The major\nbank in Sri Lanka, Bank of Ceylon has recorded a volume of loss in the current\nyear and the magnitude of credit loss has been not disclosed by the bank to\npeople, various factors may have been contributed to this negative result, it\nneeds to understand that ignorance of credit policies by customers, government\nauthorities, politicians and managers of the financial system.  How to correct this situation should be the\nmajor strategy of the financial system during the next decade.<\/p>\n\n\n\n

Deregulation began in the late\n1980s forced many banks in the world to disclose credit policies to customers\nto control risk factors and to secure market share in the intense competition,\nmany analysts view that deregulation gave excessive power to banks despite the\npoint that the market competition will generate pricing benefits to customers,\nhowever, some views that the deregulation gave the power to exploit customers,\nand finally, when liberal decision making of banks appeared banks were\nexploiting customers and the regulatory authority established a banking\nombudsman office and many times the ombudsman office investigates the\nconsistency of bank credit policies and credit decisions. <\/p>\n\n\n\n

The prime objective of bank credit\npolicies is to protect banks\u2019 capital base and customer deposits.  These two factors are associated with\nsecuring international confidence in the payment system.  In Sri Lanka, 99% of credit customers have no\nunderstanding of the prime objective of bank credit policies.  Neither private nor government banks\nattempted to educate the prime objectives of bank credit policies which impact\nthe entire financial system of the country. Many banks use vision, mission, and\nobjectives for advertising intending to attract customers and no leaflet has\nbeen issued to describe credit policy. Bank customers must understand that\ncapital and customers\u2019 deposits are the foundation of a bank and credit\npolicies constructed to strengthen the foundation and bank staff have a\nfiduciary obligation to protecting the foundation.  <\/p>\n\n\n\n

The second aim of credit policy is\nto maintain a quality credit portfolio in a bank, which reflects the\nprofitability of a bank and the entire banking system in a country. Credit\nportfolio management associated with various concepts and trading bank experts\nalways advised that the management of a diverse credit portfolio helps to risk\nminimization like in investment management. \nFor example, a bank could maintain Rs. 100 billion credit portfolio that\nshould be allocated to different industrial areas in terms of risk and\nreturn.  This is a highly practical\naspect that invites more research in a bank and to set the portfolio structure\nbase on practical finding, the profitability of the industry, accounting\nstandards, and prognosis. The method of setting a portfolio structure is\nbanking secrets, which might differ from one bank to another.<\/p>\n\n\n\n

Banks don\u2019t need to disclose\ninternal secrets to customers or one bank to another as they are management\nstrategies, however, customers must know the bank credit policy regarding the\naccounting standard, management quality, and collateral quality expected by\nbanks. If customers have not a clear understanding of policy matters on\nindustry discerning, competitive standards of companies, management attributes\nof customers they would have gone to the president asking credit supports from\nthe banking system as it happened in the recent past.        <\/p>\n\n\n\n

To understand bank credit policies\nand to gain mutual befits from this process customers need to realize several\npoints.  The first requirement is that\nbanks provide credit supports to customers based on capital and customer\ndeposits, which are direct liabilities of the bank balance sheet. Bank credits\nare risk assets, which generate from the liabilities to support the community.\nBanks whether they are owned by the government or shareholders banks have an\nextreme right to protect the organization. \nTherefore, banks cannot extend credits customers disregarding the\nprotection of the organization. <\/p>\n\n\n\n

Protecting for banking\norganizations, they need to place various covenants and banks can accept risk a\ntolerable level and many politicians in Sri Lanka have no idea about this.  The ignorance of politicians presses banks to\ngo beyond the tolerable level. The president and the prime minister need to\neducate politicians on this matter and banks should educate customers on the\npolicy matters. <\/p>\n\n\n\n

The regulatory authority of the\nCentral Bank has a responsibility towards the trading banks that customers\nshould be given lending policies to reconcile the knowledge gap between the\nbank and customers.<\/p>\n","protected":false},"excerpt":{"rendered":"

BY EDWARD THEOPHILUS A few months ago, the country-wide highlighted problem that was directed to the president was difficulty in obtaining credit facilities for the small business sector and neglecting small business communities by organized banks in the country. The issue has been widely discussed by bankers as well as policy-makers of the country.  The […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[124],"tags":[],"class_list":["post-107338","post","type-post","status-publish","format-standard","hentry","category-edward-theophilus"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/107338","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=107338"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/107338\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=107338"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=107338"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=107338"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}