{"id":92955,"date":"2019-09-12T22:54:55","date_gmt":"2019-09-13T04:54:55","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=92955"},"modified":"2019-09-12T15:53:49","modified_gmt":"2019-09-12T22:53:49","slug":"privatization-of-government-banks-and-the-requirement-of-reforming-the-management-of-banks","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2019\/09\/12\/privatization-of-government-banks-and-the-requirement-of-reforming-the-management-of-banks\/","title":{"rendered":"PRIVATIZATION OF GOVERNMENT BANKS AND THE REQUIREMENT OF REFORMING THE MANAGEMENT OF BANKS"},"content":{"rendered":"<h2><span style=\"color: #0000ff;\"><em><strong data-rich-text-format-boundary=\"true\">BY EDWARD THEOPHILUS<\/strong><\/em><\/span><\/h2>\n\n\n<p>Privatization\nof government owned banks has been an issue in Sri Lanka since early 1990s and\nmany have no idea why the issue was emerged at that time, and it seems that now\nthe issue has involved in politics rather than considering the facts&nbsp; related to the requirement of privatization\nor popularly called expanding the ownership of government banks.&nbsp; Why this issue emerged in an inappropriate\ntime in the country, where is preparing for elections, is difficult to\nunderstand and the government had plenty of time since 2015 to openly talk\nabout the issue and educate people on the issue. The management of banks in Sri\nLanka had been associated with many problems since beginning of the organized\nbanking system in the country in 1800s and the appointing a banking commission\nin 1930s was the best example to such problems. However, the recommendations of\nthe commission did not solve the issues and the problems in relation to the\nbanking and banks management in the country expanded to the future. The major\nrecommendation of the Pokkanavala Commission or popularly called the Banking\ncommission supported to establish Bank of Ceylon with a private and public\npartnership, the ownership structure was changed when Mr. T.B.Illangaratne was\nholding the portfolio of Finance and new trading bank called People\u2019s Bank\nunder the fully ownership of the government was established during the tenure\nof Mr. Illangaratne. Banking has considerable problems in many countries\nworldwide and it doesn\u2019t want to involve in petty politics and the problems\nrelation to the management of banks need to consider independently.<\/p>\n\n\n\n<p>Late\n1980s I participated in an exercise of risk assets review in (Corporate and\nMedium Market) Bank of Ceylon with consultants of the World Bank and found\nlarge scale misuse of bank loanable funds by bank executives granting credit\nfacilities to customers who had no credit quality.&nbsp; Based on findings I drafted a credit policy\nmanual for the bank and don\u2019t know whether the manual is operative at this\ntime. I also advised to develop risk assets acceptance criteria for corporate\nand medium market and gave the structure of criteria, I don\u2019t know whether\nsuccessfully done the job. We also developed a case study named Contrite\nContractors\u201d to train credit officers. When the COPE discussion was going on\nabout the audit report of People\u2019s Bank, it revealed that the banks in Sri\nLanka is still providing credit facilities for contrite contractors\nrestructuring facilities have not settled within the framework of extension.&nbsp; The bad debt level of the bank had been in a\nhigher level compared to the level of trading banks in other countries and the\naccounting practice of the bank was not consistent with international\npractices.&nbsp; If the identified bad credits\nwere written off at that time, the net worth of the bank would have negative\nand as the owners of the bank, the government had not abilities to allocate\nfunds from the annual budget to recapitalize the bank. The corporate and\nexecutive management had not understood what should do to reform the management\nof bank and most of them were dices of political chess board. <\/p>\n\n\n\n<p>When\nI was watching the program of government committee (COPE) about People\u2019s Bank,\nI was surprised about the management style of government banks and it was\nreflected the stupidity of bank management using loanable fund and observed\nthat politics and political influences are destroying the public financial\ninstitutions. The chairman of People\u2019s Bank mentioned capitalization issue\nwhich is the major issue of the banking system in Sri Lanka, but he did not\nelaborate the issue people to understand the problem, which was unable to\nconvince people the nature and the size of the problem. &nbsp;&nbsp;Chairmen and the board of directors of\ngovernment banks have no idea what is the role of them as top managers and they\nare working like cheeky monkeys or children playing with the capital of the\ngovernment and customer deposits.&nbsp;\nChairman of the COPE committee was talking about customer deposits&nbsp;&nbsp; and he never talked about government\ncapital, which is owned by public in Sri Lanka. The COPE chairman should have\nexplained the problem with a broader study of the issue to public as people of\nthe country was observing what was going on. <\/p>\n\n\n\n<p>The\nmajor issue of banks in Sri Lanka is difficulty to maintain required capital level\n(combine of Ordinary Shares, Preference Shares, Convertible Notes, Retained\nEarnings, General Reserves, Minority interests in Subsidiaries, Provisions,\nSubordinated Debt, Perpetual Floating Rate Notes etc) for individual\noperations. &nbsp;In early 1980s Bank for\nInternational Settlements insisted to maintain capital adequacy based on risk\nadjusted assets (Capital \/ Risk adjusted assets) and this international\nregulation pressed the banking system in Sri Lanka to maintain capital\nrequirements with a view to demonstrate the international standards.&nbsp; The depreciating the domestic and foreign\nvalue of Sri Lanka\u2019s monetary unit with the introduction of market economic\nsystem in 1978 clearly created a monumental demand for credits in the economic\nsystem.&nbsp; To satisfy credit customers,\nbanks had problems without sufficient capital and liquidity, and increasing\nnon-performing credits in banks due to various reasons (Especially credit\nfrauds, granting credits on &nbsp;political\ninfluence, Fat game at Citi style frauds in Hong Kong Citi Bank, unmitigated\ncorruptions in government banks and ignorance of bank management) created the\ncapital crisis.<\/p>\n\n\n\n<p>Capital\ncrisis had many banks in the world after ending cold war in early 1990s, some\nbanks were closed and many banks were rescued by using various techniques and\nmanagerial strategies. For example, many banks in Australia in early 1990s had\ntremendous problems, using a variety of techniques (Making right issues, offering\nshares for capital, privatizing government banks, merging banks etc) the\nbanking system was rescued and now banks have prudent management policies.\nCapital crisis of bank must be solved educating people because bank employees\nand ordinary people of Sri Lanka have no idea about this issue and when I tried\nto settle the problem, I was threatened in late 1980s.<\/p>\n\n\n\n<p>The\nmost important point is that there are plenty of strategies to resolve the\nproblem.&nbsp; However, in early 1990s the\ngovernment attempted solve the problem using stupid method and it would have\nthe style of Arjuna Mahendran or Paskaralingam or any non-Sinhala solution but\nthey were stupid and banks need finding a permanent and acceptable solution to\nthe people.&nbsp; There are active strategies\nfor capital problems.<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Obtaining loan from\ninternational financial institutions offering shares of banks to the value of\nloan amount and the condition of the loan should be share buy back by each bank\nusing annual profits and gradually taking the ownership of banks to the\ngovernment.&nbsp; The use of this method would\nhelp to learn management strategies under the guidance of international financial\ninstitutions.&nbsp; This also supports for\ndisciplines in bank management.<\/li><li>Offering bank shares to\ninsurance and superannuation organizations in the country and implementation of\nshare buyback.<\/li><li>Offering shares to small\ndomestic companies and rural people to expand to share ownership to rural poor.<\/li><li>Offering shares to\ndeposit holders of the bank and reducing the cost of interest expenses.&nbsp; This strategy will increase the profitability\nof banks and increase the ability to share buyback. And ensure the rights of\nminority shareholders of banks.<\/li><\/ul>\n\n\n\n<p>Privatization\nof public bans creates high risk to the government of Sri Lanka because it\ncould use to control the government policies as well as to money laundering\npurposes.&nbsp; Therefore, lateral thinking\nabout the privatization program is vital.<\/p>\n\n\n\n<p>Sri\nLanka desperate for capital and because of this condition the country should\nnot get caught to robbing banks programs.<\/p>\n\n\n\n<p>(Next\nI would like to write on liquidity issue and issuing relating to credit\nmanagement)<\/p>\n","protected":false},"excerpt":{"rendered":"<p>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&nbsp; related to the requirement of privatization or popularly [&hellip;]<\/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-92955","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\/92955","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=92955"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/92955\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=92955"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=92955"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=92955"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}