Cabinet approves Committee to evaluate all State banks

• PM proposes Committee to evaluate structure, functions of State banks 
• Cabinet Spokesman says Committee in response to public complaints of high interest rates, other issues
• Says State banks have responsibility to work the best interests of citizens, economic development
• Cabinet believes qualitative and structural change of State bank system needed 
• Pledges to appoint separate Commission to restructure cooperative banks in future

By Uditha Jayasinghe   

Cabinet yesterday approved a proposal by Prime Minister Mahinda Rajapaksa to appoint a committee to evaluate the functions of all State banks and their affiliated bodies, and recommend legal and administrative measures to ensure that they carry out Government decisions.  

The proposal was presented by Prime Minister Rajapaksa as the Finance Minister and the committee will be chaired by former High Court Judge Sisira Ratnayake. Cabinet Spokesman Bandula Gunawardana said that finance and banking sector experts will be appointed to the committee to evaluate the functions and structure of State banks and make appropriate recommendations. 

“There has been much public discourse recently about the issue of debt and how this impacts many people. These days the Prime Minister encounters many people during his visits to villages and rural areas and many complaints have been brought to him about the administration of loans, usually at very high interest rates and on very unfair terms.”

“This issue was discussed at length at the Cabinet meeting this week and it was decided that a committee should be appointed to look into the way State banks function,” Gunawardena told reporters at the weekly Cabinet briefing. 

According to the Cabinet Spokesman the consensus at the Cabinet meeting was that “there needs to be a qualitative and structural change in Sri Lanka’s (State) banking system,” and that “this has to be done for the benefit of the public, especially the poor.”

He insisted that banks such as Sanasa and Regional Development Bank (RDB) have a responsibility to ensure that low interest rate loans are easily accessible to the more vulnerable segments of society but that the sentiment of the Cabinet was that this was not the practical reality on the ground.   

Gunawardana went onto say the Cabinet of Ministers was of the opinion that not only State banks but also the cooperative systems, which includes smaller banks that lend to the agriculture and informal sectors of Sri Lanka’s economy should be revaluated, especially since they do not come under the purview of the Central Bank. 

“Once elections are over and a Government is formed we hope to appoint a Commission to look into these issues.” 

A press statement released by the Government Information Department said that the Cabinet of Ministers was of the view that the banks had not responded as effectively as possible to the COVID-19 crisis. 

“The State banking system and their affiliated bodies have to operate formally and effectively to overcome the challenges encountered by the Sri Lankan economy amidst COVID-19 pandemic. However, it is apparent that the State banks have operated away from the fundamental objectives formulated at the initiation of those State banks and have operated violating provisions and procedures.” 

However, international ratings agency Fitch this week released a report revising down the operating environment (OE) score for Sri Lankan banks to ‘B-’ from ‘B’ after the sovereign rating was downgraded to ‘B-’ in April 2020. 

In the report Fitch ratings pointed out banks are more susceptible to negative shocks after having previously experienced significant volatility in economic variables, such as interest rates and exchange rates in times of stress.

Sri Lanka’s five-year average real GDP growth is below the median for ‘B’ rated countries. The economy grew by 2.3% in 2019, slower than the 3.2% in 2018, mainly due to weak growth in the services sector after the April 2019 Easter attacks. Private sector credit, which grew by 16% in 2018, expanded by only 3.9% in 2019.

As a result, lending by Sri Lankan banks has grown more slowly and asset quality has deteriorated. Loan growth picked up in the last quarter of 2019 to 5.6%, after a contraction in the first half of 2019, but remained below the 17.5% average over 2015-2018. Loan growth was 5.1% in the first quarter of 2020, but Fitch expects loan growth in the rest of 2020 to be muted due to the pandemic.

“The sector’s non-performing loan (NPL) ratio continued to rise rapidly and reached 4.7% by end-2019 and 5.1% by end-March. We expect the accumulation of potential credit stress, even though the banks are likely to report a lower stock of NPLs and Stage 3 loans in the near term than might otherwise have been the case due to relief measures.”              

An earlier Fitch Ratings report also called on the Government to extend fiscal support to counter COVID-19 economic impact rather than depending solely on monetary policy led stimulus, warning that such an approach would put additional pressure on banks.