Finance Ministry announces roll out of key reforms in State owned banks

The Finance Ministry has announced the roll out of key reforms in State owned banks.

Specific reforms include new business models for Bank of Ceylon and People’s Bank and Capital Adequacy for the two State giants; strengthening governance of all State Owned Banks (SOBs) – licenced commercial and specialised banks and strengthening the risk management architecture of SOBs.

Capital includes (a)providing further budget funds as and when required; or (b) selling new shares to institutional investor(s) (e.g. a development finance institution) or (c) a combination of (a) and (b).

In order to protect retail investors from potential losses, the Government will not seek to sell shares to retail investors in either of the banks (Bank of Ceylon/People’s Bank) until the bank has been profitable and in full compliance with all CBSL prudential ratios for not less than two consecutive calendar years following the date of this Cabinet Decision. In any event, the Government would only consider selling a minority stake in selected State banks, whilst the Government retains the majority share ownership, as articulated in the 2024 budget speech (paragraph 70).

To improve oversight of all SOBs, the Ministry of Finance will initiate the process for establishing a specialised unit under the Public Enterprises Department charged with responsibility for managing the State’s shareholdings in SOBs and to monitor and report on their performance. The Ministry of Finance will request the Auditor General to appoint qualified external auditors for all SOBs, and will enter into a Memorandum of Understanding with the Auditor General to establish this as standard practice going forward. With the consent of the Auditor General, all SOBs shall select new external auditors for the year beginning 1 January 2025 from amongst the auditing firms with substantial international footprint.

The Government will also implement in the calendar year 2024 an extraordinary procedure for the selection of independent directors of Bank of Ceylon, National Savings Bank, and People’s Bank.

The Finance Ministry said State Owned Banks (SOBs) have faced significant stress during the recent economic crisis. Inadequate risk mitigation measures and weaknesses in governance have undermined the quality of lending practices of these entities. The balance sheets of State-owned banks had been used to absorb losses of State-Owned Enterprises (SOEs) and help finance large fiscal deficits thereby delaying reforms and accumulating debts, which contributed to the economic crisis.

Direct and indirect exposure to the Government and related activities dominated the balance sheets of the SOBs, diminishing their ability to serve their expected purposes such as advancing financial inclusion and addressing market failures in the provision of financial services to the productive sectors of the economy.

In order to prevent a recurrence of such detrimental practices, it is necessary to implement a number of reforms in SOBs relating to governance, risk management, and oversight as outlined in this document. Implementing the proposed reforms for SOBs in Sri Lanka is crucial to enhance efficiency, effectiveness, and financial stability.

“These reforms can streamline processes, improve governance, and modernise banking practices, making the respective banks more competitive in the market. Additionally, these reforms can reduce the fiscal burden on the Government, enhance financial inclusion, and improve transparency and accountability,” Finance Ministry said. The reforms and the roll out have been approved by the Cabinet of Ministers in April.