SME Bank-Lankaputhra merger likely in October

The controversial merger of the SME Bank with Lankaputhra Development Bank (LDB) is likely to take place next month, The Sunday Times FT learns.

“We have no role in the merger. It’s Lankaputhra Bank that is handling this exercise and they are carrying out research ahead of the move,” said Douglas Weerasinghe, SME Bank CEO, when asked to comment on the latest situation, adding “We are a passive party”.

Other officials at the bank said Treasury Secretary Dr P.B. Jayasundera late last month had met SME Bank employees and indicated they would be absorbed to Lankaputhra with letters confirming this being given before the end of August. However employees say they are yet to receive the new letters of appointment.

The proposed merger, which has triggered concern amongst small industrialists as yet another attempt to kill development banking at the lower end of the scale (small and medium enterprises), has caused many other flutters in the past few months.

For example, in late June, Jayasundera committed a major faux pas when he ordered the board to resign and a new one constituted and included LDB chairman A.de Vass Gunawardene and some of the latter’s directors as nominees.

When the SME Bank company secretary wrote to the Central Bank (CB) and sought its concurrence in the appointment of the new directors, the CB said under the new Banking Act, a director cannot serve in two banks and such an appointment is illegal. The Treasury Secretary’s order was put on hold.

Then again, as per new governance rules where directors are personally held responsible for their actions, the new chairman of SME Bank Lalith R de Silva, a Finance Ministry representative appointed after the earlier blunder, hasn’t authorized the transfer of deposits and investments to LDB, though ordered to do so by the Treasury Secretary in a letter dated August 3, it is learnt.

This is based on advice that it would be considered a bad decision to transfer deposits from currently high interest commercial accounts to a low interest account. “On advice he has not transferred the deposits and investments totaling Rs 1.4 billion in which the SME Bank gets tidy interest income,” a banking analyst said

The merger between the two banks which was to include five regional development banks was recommended in the 2007 budget. However the regional banks with powerful unions resisted the move and the plan to draw them into the merger has now been abandoned.

The banking analyst said LDB has turned into an infrastructure development bank and wouldn’t service the needs of small and medium scale investors. Lankaputhra for example is funding Mihin Air among other costly and seen as politically-motivated projects and is desperately short of cash, he said, adding that the LDB is eyeing the assets at cash-rich SME Bank.

The SME Bank began in mid 2005 to fill the gap created by development finance institutions like DFCC and NDB turning into commercial banks. It was focused on entrepreneur development and venture capital. The analyst said that the difference in the SME Bank was that it is a risk taker and helps start ups unlike other DFI’s.

The SME Bank has had its own share of problems during the time it came under the purview of Rohitha Bogollagama’s then Ministry of Enterprise Development, when loans were given to cronies and political catchers. “In some cases the recipients couldn’t be traced,” the analyst said, adding that more than 1,000 loans were given.

He said the NPA (Non Performing Assets) is 35 percent of the loan portfolio with many expected to be written off. The bank has lent more than Rs 500 million in loans so far while investing Rs 1.4 million in interest-accruing deposits.

The analyst said the authorities were turning away from good development banking facilities for small investors at a time when the World Bank itself has complimented DFCC as a model DFI in the world.