Will the State banks take the plunge along with SriLankan?

The extraordinary gazette notification appointing the Presidential Commission of Inquiry was issued on 2 February. The COI comprises three senior judges, a retired Deputy Auditor General and the Director General of the SLAAS Monitoring Board. The commission is expected to investigate, inquire into and report on inter alia the following:

Alleged irregularities in connection with SriLankan Airlines Ltd., Sri Lankan Catering Ltd. and Mihin Lanka Ltd. during the period from 1 January 2006 to 31 January 2018 pertaining to;

“The management, administration, and conduct of affairs of SL Airlines, SL Catering, Mihin Lanka. Whether any contractual obligations related to these institutions have been entered into or carried out, fraudulently, recklessly, negligently, imprudently, or irresponsibly, without due professional care or due diligence, considering accepted norms, guidelines and best practices resulting in loss, damage or detriment, either direct or imputed, to the Government, any statutory body or any other entity including SL Airlines, SL Catering and Mihin Air.”

In this context it is pertinent to consider some of the bank facilities or rather funds the Government provided after the new Boards were appointed after 2015 to these institutions. According to reports and public statements that appeared from time to time, very large loans have been granted by the three State banks, BOC, PB and NSB. 

Unconfirmed information indicates the total of such facilitations from the State banks exceed Rs. 100 billion. Among these People’s Bank has granted a loan of Rs. 17 b to SriLankan in July 2015, followed by another facility of $ 75 million released in three tranches.

In addition People’s Bank has reportedly granted a loan of Rs. 1.7 billion to Mihin Lanka in 2015 and another facility of $ 5 million to the same entity in 2016.

All these facilities have been granted for one-year periods and against Government guarantees issued by the Treasury. The Minister of Finance during the period was Ravi Karunanayake. 

A Treasury guarantee requires the approval of the Cabinet and in particular when the sums involved are so large. Such amounts have to necessarily fall within the limits of the approved Appropriation Bill. The banks have received no repayments on account of these loan facilities from these institutions. 

According to the CBSL good governance guidelines, the banks are expected to transfer all non-performing loans and overdrafts to the NPL section and indicate this in the annual balance sheets. If this exercise was resorted to, the bank balance sheets would have shown some negative values in the final balance sheets, consequently affecting their profit and loss position. 

Probably the banks did not do so because there was a Government guarantee attached. But unless it was first given on a revolving basis, each time it is extended the liability has to be sanctioned for further continuation by the Cabinet. The COI will examine this aspect to ascertain whether there has been any irregularity in the transaction procedure.

The banks should have in their books computed interest on these loans and transferred them to the profit and loss statements of the banks for the relevant periods. Although such amounts represent hypothetical figures not recovered actually, they have gone to add up to the billions of profits the banks have shown!

It remains a big problem as to when these huge sums will be repaid to the banks by the defaulting institutions. And whether they will ever be paid. When the Government will discharge its obligations and how it will be done is another problem area. 

In the final analysis it is the State banks which will ultimately absorb these huge defaulted amounts with the consequences of a serious liquidity problem to be faced by them. Perhaps the clamour to privatise them has some bearing or relation to these issues.

The COI appointed by the President to inquire into the shady deals devolving round SriLankan and Mihin Lanka perhaps will be able to throw light about the operating nexus responsible for this state of affairs. However, the attention of the CBSL Governor and the Auditor General has to be invited on these matters under the circumstances.