Systematic throttling of local private banks

Look at the plight of local private banks today. The Head of State and the government as a whole has accepted the policy of encouraging local enterprise for many a reason. Thus it was found necessary to embark on various projects like the “Api wavamu – Rata hadhamu”, “Deshiya Nispadana”, etc. Some sectors within the government do seem to engineer their own agendas contrary to this policy. The phenomenon is particularly confusing as per the recent Code of Corporate Governance by the Central Bank. Many institutions tend to take the law into their own hands eventually burdening the President who has his hands full in intervening to resolve many an issue. The writer posed the question recently in a newspaper article as to whether a code, regulation or rule can annul, amend or supercede substantive law. A bank is incorporated under the Companies Act and the Banking Act only regulates the industry. The former is administered by the Ministry of Trade and the latter by the Ministry of Finance. Appointments, election (including re-election), qualification of directors are all matters coming under the purview of the Companies Act and the question arises whether it would not be illegal and procedurally incorrect for the Monetary Board to attempt to frustrate legal provisions in the Companies Act. It could possibly be construed as abuse of power. Another aspect which raises eyebrows is the open boast by a Managing Director of a local private bank that (to quote) - “ I have been involved with the process of putting out this code from March last year and a fair number of inputs have been from me ……..” (The Sunday Times FT of 13.01.08). Given the rivalry and stiff competition among the banking community, one seriously wonders whether this is a glaring case of conflict of interests, particularly if all banks concerned have not been so represented at the think- tank sessions. Nevertheless, it is not difficult to discern that some ingredients that go to make up the code are clearly subjective and tend to target a certain bank which has been bold in its approach to poverty alleviation, innovative projects and in healthy competition not only with local banks but foreign banks as well. According to news reports, this bank has complained to court that its submissions have not been heeded nor was it consulted.

Monitoring and Supervision
The Bank Supervision Department of the Central Bank is charged with the responsibility of monitoring and supervision, which is an important and essential facet of its functions in justification of its very existence. For the Central Bank to lament in generalised comment that the banks did not come up to the mark in good corporate governance (The Sunday Times FT of 13.01.08) is to plead ‘mea culpa’ in its responsibilities for monitoring and supervision and its inability and impotence to take disciplinary measures against miscreants. If the legal provisions were inadequate to penalize them, the obvious course of action would have been for the CB to equip itself with necessary powers. There is no room to think so. Now, in the absence of meaningful action, the CB chooses to wield the big stick, conveniently absolving itself, through the easy way of killing all bugs for the bite of one or a couple of them! If this code is implemented it would be perfectly logical for the Central Bank to wind up operations of the BS department or to reduce its staff to a minimum (only to accept routine returns) thereby saving a large quantum on salaries, provident fund, perks and pensions, particularly as the code contemplates in-built self-controls, stringent risk management procedures and so on, putting the banks in straight jacket. It also binds banks hand and foot because there is the legal provision in Act No. 7 of 2007 where directors are individually responsible and liable. In fact, one wonders why some of the stringent provisions in the code which are to operate (if there is legal basis) in tandem with Capital Adequacy Ratios (CAR), are necessary in the context of individual legal and financial responsibility clearly spelt out in Act No.7 of 2007? The law does not discriminate and vicarious restrictions cannot be placed which are not applicable to other companies incorporated under the Companies Act. God help the private sector – the so-called engine of growth!

Capital Adequacy Ratios
The minimum CAR at end December 2000 was 8% and the core CAR 4%. The percentages were revised from 1st January 2001 to 9% and 4 ½% and from 1st January 2003 the upward trend manifested itself in 10% and 5% respectively. If this is not throttling the local banking sector, pray what is it? It, however, greatly helps the CB to insulate itself with a safety valve for lack of monitoring and supervision. Indeed, a bullet-proof vest to fend attacks on it as enunciated by the CB in elaborating its Supervisory Review Process (SRP) to wit - “The objective of SRP is to ensure that banks have adequate capital to support all material risks in their business and also to encourage them to adopt more sophisticated risk management techniques for monitoring and managing all risks. For this purpose, banks are required to establish well-defined internal assessment processes within themselves in order to determine the additional capital requirement for all material risks, internally, and which would also be able to assure the Central Bank that adequate capital is actually held towards all their material risk exposures” (unquote). Indeed in this way, there is absolutely no risk to talk about! A typical bureaucratic approach where the small and medium borrowers who have in the recent past opted to lean heavily on outward-looking private banks for poverty alleviation could be adversely affected transferring an additional burden on the government and the public sector. State banks of course, traditionally shun taking risks (with the exception to a certain extent perhaps the People’s Bank) where security is a must, other than the extra-legal accommodation for those with political clout. It is no secret how large sums stand irrecoverable in the name of good governance. They are let loose by the CB to carry on the good work. The code is not applicable to State banks. As for foreign banks, they also appear to be exempt from operation of the code and they have been enjoying the ‘most favoured treatment’ where in terms of the CB notice of 22nd August 1997 relating to CAR, a distinction is made between locally incorporated banks and foreign banks. The former is required to compute CAR on a consolidated basis while the latter is permitted to do so, on an institutional basis. Local banks, therefore, are at a huge disadvantage competitively.

CAR Standards
It is no secret that local private banks have had to resort to rights issues, debentures, merges and other measures to meet CAR standards, adversely affecting balance sheets and returns on investment to shareholders. It was on 17th January 2008 that a certain bank held an EGM to obtain approval of shareholders for a rights issue for the avowed purpose of meeting the CAR to find to its horror and that of shareholders that the shares had been traded the previous day at Rs.26.50 when the rights issue was fixed at Rs. 25. There is no need to elaborate on the predicament. The Issue being not underwritten, the bank would be hard-pressed to find additional funding through alternate sources to compensate for whatever is not subscribed, compounding its problems. Yes, the CB Circular on CAR dated 26th December 2007 has thought it fit to use the jackboot in preventing banks from paying dividends or to repatriate profits unless they complied and the Bank Supervision Director is satisfied it has been done. Who will invest in bank shares and would not such impediments create doubts among depositors, possibly driving them into the open arms of certain dicey finance companies? Not much intelligence is required to observe that this fiat will not hurt foreign banks at the least. All this in the name of shareholders and depositors whom the CB is hell -bent on safeguarding, not to speak of its own BS department! The irony of it is that the CB proved itself incompetent to revive certain failed finance companies in the 1990s and liquidated them with a pittance to depositors whereas a stable local finance company turned three failed companies into profitable ventures and were able to completely satisfy depositors. The CB was not even wise after the event as the Pramuka Bank episode showed. And it takes moral high ground to say that banks had not come up to the mark!

Basel ll CAR
Does Sri Lanka, a small developing country with problems peculiar to itself, need to blindly follow Basel standards? If we had followed World Bank/IMF advice tendered most forcefully a few years ago to give up rice production and to import rice, the country would have been in a veritable mess today; similarly with other “well-meaning’ advice. It is imperative that highly paid officials should utilize their faculties of independent judgments in relation to the circumstances and the needs of the country rather than wait in the wings for the next trip abroad satisfying foreign advisors in the implementation of their advice to suit their own agendas. It is relevant to relate an incident during the period Dr. N.M. Perera was Finance Minister when a certain high official from the IMF was pacing the corridors of the old secretariat trying to see him without an appointment. NM flatly refused but some of his officers pleaded and finally he got a look in. NM had listened intently with his eyes closed (as was his habit) till the visitor with his high-flown economic jargon was holding forth on the virtues of devaluation. When he finally finished, NM had opened his eyes and commented - Mr. (name withheld), “if you think that you have the interests of my country at heart more than myself, you can go and fly a kite”! It was well and truly a lesson in national consciousness and the need to put country first.

Ball in President's Court
The ball is now in the President’s Court. While the government is attempting to harness qualified, experienced or capable people to manage affairs of state leaving aside narrow perceptions of age, etc, the CB is hell-bent on jettisoning hard-to-find resources in the country caring a tinker’s damn about possible adverse consequences of its actions. The banking system is clearly and inextricably linked to the economy of the county and any false move will undoubtedly spell disaster in which unfortunate event the entire blame will be on the President and the government and not on those who created the problem. It is incumbent on the President to step in and halt any abuse of power, reckless experiments, blind adherence to standards applied by developed countries, subtle attempts to be subjective in judgments and the desire of the CB to absolve itself of its responsibilities and duties through introduction of measures which would cripple local enterprise encouraging foreign and state banks, where the latter has opted for political patronage and financial mis-management rather than good governance. There were experienced elderly people serving the Monetary Board as well, some well past their biblical three scores and ten who had given of their best and proved themselves. The present Board needs to put themselves in the position that their code-proposed discards find themselves.

The Sunday Times FT referred to carried the hilarious statement made by a senior CB officer that the age limit of 70 years stipulated was because ‘some directors in LCBs being very old almost never participated at board meetings and thus there was no substantial contribution by them to the banks. Due to these reasons, the shareholders and depositors cannot depend on them for the well-being of the banks.” If this was the puerile thinking behind the move, it does no credit to the intelligence of the members of the Monetary Board. It apparently is in the blues when it comes to understanding the working of directorates, be it banks or other companies and the individual output of their members - quantitative or qualitative.

They are not working full time. It is not surprising that the CB has decided then to throw the “babies’ with the bath water in the Wijetillekes, Gunatunges, Amarasuriyas, Kotelawelas, Jayawardene’s, Vittaachis et al! Is this the reward and the gratitude the state through its agency, the Central Bank, gives to people who have proved themselves in business and stood shoulder to shoulder with foreign enterprise and perhaps gave them a run? The CB has chosen to introduce fresh blood (infringing on the rights of shareholders) to make the banks more dynamic it seems.

Doesn’t speak well of our banking stalwarts who are still sought after for advice, lectures and positions in companies, despite age. Let us hope there would be no more of this category sitting on the Monetary Board but the final say there will be with the President who has, according to another newspaper report, ‘mocked” the CB with an appointment of a 75 year old to head the Lankaputhra Bank. If he were to do the same with the Monetary Board, the CB will have to hide inside the vault! Before that humiliation, let wiser counsel prevail.