Baseless tirades against banks

The barrage of criticism against commercial banks and their regulator – the Central Bank (CB) – by Ministers Ramesh Pathirana and Wijeyadasa Rajapakshe recently has ruffled the feathers of the banking community. 

It was under the patronage of the same ministerial combination, the Anti-Parate Activists Business Forum was held late last year, during which a resolution was adopted for the abolition of the Parate Law. A considerable amount of propaganda was carried out over the last two years, calling for the suspension of the parate execution law by a few pressure groups. To appease this vociferous crowd with the impending national elections in mind, a bill was passed in Parliament to suspend the Parate Law until 15 December 2024. However, although the law was passed, the CB has not issued a notice to commercial banks to halt the foreclosure actions, thus, creating a state of confusion among the business community.

Even the IMF in its latest review, pointed out that the suspension of parate execution should be ended as soon as possible while emphasising its continuity would impede the banks’ ability to manage Non-performing Loans (NPL) and price credit risks. The IMF’s rebuttal of the controversial move comes in the backdrop of some groups (including Rajapakshe) calling for the extreme step of abolishing the foreclosure legal provision. Observers have repeatedly stressed that by taking away a vital authority which acts as a deterrent against wilful defaulters, banks could adopt a highly risk-averse approach towards lending which could delay the recovery of economy apart from even top-quality borrowers having to bear increased lending rates.

Contrary to the claims of some, banks played a crucial role by assisting the recovery of entrepreneurs who were affected by the COVID-19 and the economic crisis. In 2023, banks lent Rs. 704 billion to SMEs and their contribution to the country by providing foreign exchange to fund critical imports at the height of the economic crisis is praiseworthy.

Although the ambitious politician had derided the profitability of banks, just like every other sector, banks too are required to generate profits in order to provide dividends and satisfactory returns to shareholders. Banking firms also pay a substantial amount of taxes (the effective tax rate of the sector is around 55%), which the presidential aspirant has overlooked. 

The banking system is a vital and sensitive component of a country’s economy and it is critical that any legal changes related to the sector are undertaken after a considerable thought and evaluation, supported by the advice and guidance of experts instead of being influenced by groups and individuals who pursue hidden political and commercial agendas in the guise of promoting MSMEs. Short-sighted legislative actions that could undermine the stability of the financial system of the country at the behest of power-greedy politicians who periodically crossover from one side to another is the last thing we need when signs of economic recovery are beginning to surface.