Is history repeating for State Banks?
The fate of State Banks in Sri Lanka has once again become a widely discussed subject focusing on new reforms. The Government and the authorities have denied such a move but the various explanations given lead to conjectures due to a suppression of factual information. In such a context it is relevant to recall a similar situation that existed in the early part of the 1990s which even led to a sensitive statement by the then Minister of Finance in Parliament announcing that “the two state Banks were insolvent”. This position was so controversial that it became necessary for the Ministry the very next day to assure customers that the government would continue to guarantee depositors funds and the transactions of the banks. We are yet to see whether what is happening today is a repeat of the same.
What happened then was that the two banks fell short of the capital adequacy ratios for commercial banks introduced by the Bank for International Settlement in Basle. The government had to consider the available options to fulfill the required recapitalization and privatization apparently became the recommended choice influenced by the international agencies.
A mission from the IDA (International Development Association) in Colombo during Nov./Dec. 1990 period, in the process of an evaluation of the country’s economy had a discussion with the Government and bank officials about their preliminary recommendations for the Sri Lanka Banking System. They circulated a note under the sub heading “IDA Assistance” and proposed a Banking Sector Project with focus on the following;
- Re-structuring Bank of Ceylon (BOC), People’s Bank (PB) and National Savings Bank (NSB) which would inter-alia involve substantial privatization of the BOC
- Setting up of a reconstruction and recovery agency (RARA) to deal with large troubled borrowers (loan defaulters)
- Strengthening of the Financial Sector and regulatory policy
- Introducing an accounting and auditing framework and to provide long term funds for productive uses.
It was further recommended that a joint ADB/IDA team visit Sri Lanka in Feb./March 1991 to prepare a banking sector project to achieve the above.
The Ceylon Bank Employees Union (CBEU) started educating its membership immediately in the midst of this development and also sought clarifications from the authorities about the ongoing process. The then Secretary to the Ministry of Finance wrote to the Union on 28th December 1990 stating that there is no proposal to privatize BOC or PB.
During this period the international agencies engaged in the restructuring programme initiated an international audit on the two state banks to be conducted by Booz, Allen & Hamilton, and Arthur D. Little.
In the same period in the Executive Summary of a World Bank report the following reproduced extract appeared:
“………….The two state owned banks, Bank of Ceylon and People’s Bank which own 60 per cent of the commercial banks’ assets but are insolvent when internationally accepted provisioning for bad debts is taken need to be restructured after appropriate provisioning and recapitalizations is completed. In particular the Bank of Ceylon should be privatized to improve the competitive environment of the sector. In addition the major functions of the National Savings Bank, such as supply of funds to the Government which with the expansion of Treasury bill sales and investment by pension funds are no longer relevant, should be phased out. As a first step, the government earlier indicated that the two state-owned banks should be privatized, a decision later reversed due to labour union opposition. It is strongly recommended that the government reconsider this recent move”
The Finance Minister’s highly sensitive statement to parliament “that the two state banks have become insolvent and their creditworthiness by international standards was in question…” was made in this background.
This brought up a serious reaction by the CBEU which was reported in the media as follows
“The Bank Union Up in arms – The CBEU yesterday raised a howl of protests over the statement of Prime Minister D.B. Wijethunga made in Parliament concerning the two state banks .The statement of the PM is totally untrue, such an alarming statement should never have been made ”
The capital inadequacy referred to by the PM was based on the findings of the international audit reports where they pointed out the two banks had a shortage of capital to the tune of Rs. 24 billion … Rs. 10.5 billion for the PB and Rs. 13.5 billion for the BOC.
But the government of the day yielding to the public cry decided to capitalize the two banks by providing long term bonds and further agreed on a programme to prevent any such thing in the future by adopting new operational criteria. Admitting, serious political interference in the running of the banks, not making sufficient loan loss provisions, unsatisfactory loan recoveries, banks and the Government entered into an agreement to put an end to this state of affairs. It was agreed that the two banks should be run on commercial considerations and to facilitate this the government agreed to grant autonomy for the directors to conduct the affairs to assure that there will not be a repetition in the future.
It was also agreed that the Acts of the banks would be suitably amended to provide the autonomy and to prevent political interference. The Government accepted in principle that any loan to be given by the banks on a directive by the government should be guaranteed by it and for the banks any such lending would be a commercially viable operation.
Further a committee called the Financial Sector Reform Committee appointed by the Government to give effect and formulate regulations for the implementation of the agreement between the banks and the Government specifically provided setting norms for the performance of the banks, which was entrusted to the Secretary to the Treasury. These norms were to be set on an annual basis and revised from year to year with the target of achieving within two or three years after recapitalization, the performance of other commercial banks in Sri Lanka.
According to this agreement the Finance Minister in his budget for 1993 provided long term, interest bearing and non-transferable government bonds to the two state banks to the extent of Rs 24 billion to enable them to meet the required capital ratios. Despite all these measures the banks have again today fallen into a questionable state requiring capitalization and regularization. It is interesting to note the repeated denials by the Government of any proposal to privatize the banks in this background.The important question is who is to be held responsible for this. When all other commercial banks conduct their operations generating profits and maintaining required standards both national and International, the two state banks have failed to do so. From this it follows that this is not an industry issue. It is nothing but bad management and bad monitoring and guidance by the Treasury and the Central Bank. Who is going to take those responsible to task?
If we carefully study, with the limited information available, the performance of the banks after the capitalization exercise we can see clear violations of all conditionality agreed between the government and the banks. For this violation all parties are equally responsible.
During the ensuing period the BOC had to go for two debenture issues to maintain their capital requirements. The PB has borrowed nearly all monies lying in the Employees’ Pension Fund to maintain the bank’s capital adequacy. It is reported that they have issued debentures to the pension fund to the tune of Rs. 15 billion. The Board of Trustees appointed to control the Pension Fund has been reduced to a coterie of ‘yes’ men consenting to pool nearly 87 per cent of the balance in the fund amounting to approximately Rs. 40 billion into one basket in the bank.
This is in addition to the Asian Development bank pumping in Rs. 8 billion to the PB in several stages during the period 2005 to 2008 under a strategic plan given by them for augmenting the banks performance! An agreement was reached between the Government and the ADB to provide funds to the Government for injection of capital at the PB under the ADB programme to support the Financial Sector Reforms in Sri Lanka. On 17.12.2004 the Ministry of Finance, the Government and the Board of Directors signed an agreement to the contents and implementation schedule of a development plan prepared under this arrangement.
Where has all these monies gone? The private sector banks in this country with no such ex-gratia assistance are doing quite well.
The strange thing is in April 2000 the PB hired six so-called specialists with salaries and perks hitherto unheard in the public sector to help run the bank on a commercial footing under the autonomy granted. The bank even brought in a foreign General Manager on contract who functioned with this team of specialists for a period well over four years. The number of these hired specialists increased to 13 subsequently during this period and most of them are still batting on. Few have resigned recently. One of those specialists stand elevated to the current Chief Executive position in the bank. But the bank’s position has been ever on the decline. For several years the bank is depending on a letter of comfort issued by the Ministry of Finance as the proprietor of the bank (a copy of this letter appear in all published annual reports of the bank) to guarantee the shortfall in the capital, in order to survive the mandatory regulated standards.
The bank has more or less completely changed its direction from supporting the cooperative movement and the rural masses on whose behalf the bank was first set up, claiming that the bank should play evenly with the other banks treading on more lucrative commercial business grounds. Alas it has failed to deliver the results.
In fact the pioneers who sweated and toiled to carry forward the broader vision of the bank will be turning in their graves with this current prevailing state of affairs. From the past and present experiences we can conclude that no recapitalization would put an end to this decline.
It is an irony of history that we have to hear this death knell for a second time during our short life span, only a bit less, louder this time with hardly any visible opposition from any quarters. But we fortunately have a massive experience behind us today if we really want to guide ourselves forward in the right direction.
(The writer is a former President of the Ceylon Bank Employees Union, a former Chairman Bank of Ceylon and a former Chairman, National Gem and Jewellery Authority).
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