{"id":97773,"date":"2020-01-14T17:36:13","date_gmt":"2020-01-15T00:36:13","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=97773"},"modified":"2020-01-14T17:36:13","modified_gmt":"2020-01-15T00:36:13","slug":"the-proposed-banking-act-and-vital-area-to-be-considered-in-the-role-of-the-centraal-bak-part-2","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2020\/01\/14\/the-proposed-banking-act-and-vital-area-to-be-considered-in-the-role-of-the-centraal-bak-part-2\/","title":{"rendered":"THE PROPOSED BANKING ACT AND VITAL AREA TO BE CONSIDERED IN THE ROLE OF THE CENTRAAL BAK (PART 2)"},"content":{"rendered":"

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

Governance <\/strong>\u2013\nIt is not clear governance refers to the management of the Central bank or\nother trading banks.  I believe that\nCentral Bank has own policy and procedures manuals, which are updated\namalgamating internal circulars. However, governance of the Central Bank should\nconsider appointing members to the Monetary Board and heads of departments and\nother matters.  As the regulatory\nauthority of the financial system of Sri Lanka, which consists of trading\nbanks, Non-bank financial markets, the Development Banking market, the Leasing\nmarket, the Stock Market, the Insurance Market, the Superannuation market and\nother the monetary board of the Central Bank should be consist of\nrepresentatives from all markets. Central Bank should have the authority to\ncontrol and regulate all markets.  The\nCentral Bank should not be a market player doing market business such as EPF\nmanagement, rural credit operations, and development lending, etc.  When the regulator becomes a market player it\ncreates more negative impacts on the regulatory role. <\/p>\n\n\n\n

  •  The amalgamation of Off-show Banking Units and\nDomestic Banking operations into a Single Banking Business <\/strong>\u2013\nThis is also a controversial aspect of bank management. This idea is not clear\nand since the 1980s this idea has been in the banking circle. The amalgamation\nof off-shore banking units (FCBU units) might be a good policy action, however,\nindividual banks will object to it.  In\nthis connection, the Central Bank needs to think about risk factors. Many trading\nbanks in Sri Lanka shows profits from exchange earning (For example X bank has\nthe US $ 1000 balance in Off-shore banking unit and the accounting standard of\nSri Lanka insists that this deposit needs to record in Sri Lanka rupees and if\na US $ 1= Rs 175.00, it will record in the balance sheet Rs 175000 asset and Rs\n175000 liabilities to customers.  If the\nforeign value of Sri Lanka Rupee depreciates and become the US $ 1.00 = Rs\n180.00, the end of the month provision records the Rupee value of US $ 1000\nincreased by Rupees 5000, which treats as exchange earning or profit.  When there are millions of the US dollar\nbalance in a bank, automatically exchange earning goes an upward trend but it\nis not liquid earning to the bank It is paper profit and the government banks\ntransfer to .the treasury as earning and finally the government uses such book\nentries for fiscal spending, which supports inflation in the country.  One day a bank chairman asked me although the\nbank has so much of profits they made by the change in or depreciating value of\nSri Lanka rupee, but not real earning from the business. There is nothing wrong\nwith accounting provision, the impact of the increase in exchange profit would\nbe creating more money supporting to inflation. Central Bank should talk with\nFCBU owned trading banks and should come to regulate the accounting system.<\/li><\/ul>\n\n\n\n

    In Western countries, trading banks\ntreat exchange earning as bank profit, however, in those countries, there is a\ntrend of exchange rate going up and down. \nIn such a situation, treating exchange gains would not be negative to\nthe economy, but in Sri Lanka, it would be negative to the economy when there\nis a continuous depreciation of the foreign value of Sri Lanka rupee.  Originally, the legislation to establish the\nCentral bank aimed at stablishing the domestic and foreign values of Sri Lanka\nrupee and the stabilization of the economy, despite these aims the central\nfailed to achieve aims.<\/p>\n\n\n\n

    Amalgamation of off-shore banking\nunits and domestic business such as export and import business is good policy,\nhowever, Sri Lanka has a trend in boosting international business, in such a\ntrend, it is better to allow international business to major banks with\nstandards and small banks and non-banking financial institutions should give\nonly retail international business such as providing services to tourists, and\nmaking inward and outward remittances. Exchange contracts (forward) for export\nand import businesses should do only major banks. This idea needs a broad\ndebate, which should be participated by customers, banks and government\npolicymakers.<\/p>\n\n\n\n

    • Improving Resolution,\nEnforcement and Supervisory Actions<\/strong>\n– The Central has a major role as the banker to banks and the nation.  This role needs to expand covering non-bank\nfinancial markets, which creates many problems in the financial system. The\nregulatory role is the priority of reserve banks in all countries and supervisory\nactions also have become vital as an aspect of the role and many banks and non-\nfinancial institutions need well supervision and good advice to remain as\nsolvent institutions.  Banks and non-bank\nfinancial institutions have no policy and procedures manuals.  These institutions don\u2019t conduct risk asset\nreviews once in two years and classify credit portfolio and make credit loss\nprovisions.  Bad credit decisions will\nincrease in non-performing credits and finally, institutions should go courts\nto recover loans and exercise para te execution regarding fix or floating\nmortgage charges which might not appropriate in a democratic society.  Credit loss may create unexpected loss to\nbanks and when the loss cut off from the capital the balance sheet many reflect\nnegative net worth.  To avoid this\nsituation, the regulation and the supervisory acts of the central bank must\neffective. banks and non-bank financial institutions must need risk acceptance\ncriteria for customer and industry-wise. \nThe central bank must guide banks and non-bank financial institutions to\ndo these works. <\/li>
    • Capital ratios are\nexpected to increase <\/strong>\u2013 What is capital of\ntrading banks and non-bank financial institutions is a broader area and\nfinancial text writers outlined that capital functions as the provision of\nfunds for the development and expansion of finance organization’s\ninfrastructure, to provide buffer against unexpected credit losses so to\nprotect depositors’ balances and work as contributor to the profitability. Balance\nsheet items such as ordinary shares that should be called or paid up shares and\nnot uncalled shares or unpaid capital, preference shares, convertible notes\nthat began as debts instrument such as bonds or treasury bills, retained\nearnings, general or special reserves, minority interests in subsidiaries,\nprovisions, which don’t represent permanent commitment such as credit loss\nprovisions, subordinated debt, and perpetual floating-rate notes are considered\nas capital. In the prudential supervision process, capital ratios expected is\ngiven in BIS regulations.<\/li><\/ul>\n\n\n\n

      Capital\nratios are considered as capital to some balance sheet measures.  The widely applied capital ratios are the\nratio of capital to total assets, which is also called the gearing ratio.  The other important capital ratio is the\nratio of capital to risk-adjusted assets. \nThis ratio is an attempt to relate the risk associated with the bank’s differing\nassets portfolios to its ability to absorb unexpected losses. Risk weighting to\ndifferent kinds of assets in Sri Lanka is a quite difficult task.  In the risk weighting process, my experience\nis temporary overdrafts, Bills Receivable and investments in subsidiaries\ncontain very high risks. Bank of England has published many articles on this\nmatter in its Quarterly Bulletin. The Central Bank of Sri Lanka can use a\nrisk-weighting system advised by Bank for International Settlements.<\/p>\n\n\n\n

      As\nI mentioned before Law of Negotiable instruments has been changed by many\ncountries and the central banks as the regulatory authority and the banker to\nbanks need to consider modernizing the law relating to negotiable instruments\nand laws of banking operations. From time to time the central bank issued\ninstructions and Weerasooriya (1974), Banks and Banking Law in Ceylon have\nsummarised the law and it should be updated by the central bank. Merchant\nbanking is a new area of development and electronic banking has created many\nproblems creating liabilities to banks and customers.  Many countries have taken steps; however, the\nactions or response of Sri Lanka is slower and there should be regulations to\nspend at least 5% profits for staff training purposes, which is the direct way\nto enhance productivity, preventing frauds, improvement of credit quality and\nmany areas. Banks, which spend 5% or above annual profits for staff training\nshould be given tax concession and for double deductions like in some\ncountries. <\/p>\n\n\n\n

      Banking\nis a highly dynamic business, which has a trend to change policies and\nprocedures.  Many bank executives in Sri\nLanka have poor knowledge and practical experience in this area     <\/p>\n","protected":false},"excerpt":{"rendered":"

      EDWARD THEOPHILUS Governance \u2013 It is not clear governance refers to the management of the Central bank or other trading banks.  I believe that Central Bank has own policy and procedures manuals, which are updated amalgamating internal circulars. However, governance of the Central Bank should consider appointing members to the Monetary Board and heads of […]<\/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-97773","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\/97773","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=97773"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/97773\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=97773"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=97773"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=97773"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}