Business Times

Bank making big profits: At what cost?

A senior citizen wrote this week to complain how unfair banks in the country are.
Referring to the enormous profits made by the National Savings Bank which was reported in the newspapers, the citizen said in a letter published in our newspaper that these profits are being made at the expense of depositors like him.

“They reduce interest rates from 15 % to 10 % on our deposits and gloat about how much profits they have made,” he said, in a general comment about banks. At the same time, Treasury Secretary P.B. Jayasundera lashed out at banks saying they were charging high rates for their lending and making ‘enormous’ profits without being sensitive to the development needs of the country.

In a keynote address at the Central Bank’s 60th anniversary celebrations in Colombo last week, he said that over the past three decades the private sector had to borrow at interest rates in excess of 30 %.
Many companies, he noted "continued to remain in high debt positions despite the fact that they had paid capital and interest well in excess of initial debts". He added that "very few banks [had] gone for restructuring of non-performing loans and under-prforming businesses to recover their loans [instead] most of the banks [had] resorted to easy options of applying the provisions of debt recovery legislations".
Why do Sri Lankan banks have a huge margin between their lending and borrowing rates unlike their Western counterparts where the difference is a few percentage points?

The banks have argued that the other costs including transaction costs are high and hence the case scenario in Sri Lanka is different to other countries. That’s their point of view which on many occasions has been challenged by others and in the latest case, Dr Jayasundera.

Ever since the war against terrorism began three decades back, the private sector has struggled to maintain costs and show reasonable profits. However, banks have shown profits in any situation: Be it during the difficult years of fighting the LTTE; the second attempt to oust the government by the JVP or any other crisis period. While every sector struggled to maintain a decent profit or break even, the banks were roaring ahead.

When interest rates were high – for both depositors and borrowers, banks were well off. In the past year, after the government ordered state banks to reduce interest rates to drive private sector credit and energise the economy, they did so but private banks were reluctant.

However interest for depositors dropped while the process to reduce lending rates was slow. Dr Jayasundera also said: "The CB’s Bank Supervision Department should undertake examinations not just to ensure that banks have complied with prudential requirements such as capital adequacy, liquid assets, non performing loans, etc. but also to see whether the intermediary costs by way of salaries and other benefits, operation expenses and so on are justifiable".

He has raised an interesting point about the benefits that bank staff get in terms of high salary packages, low interest loans and other perks. In recent times, the collapse of some finance companies resulted in many depositors transferring their money to banks which then cut interest rates in line with a government decision to stimulate economic activity which had not picked up after the war ended last year.

Seeing their monthly interest income falling sharply, elderly depositors appealed to the President who then ordered a 20 % bonus interest on their deposits in January this year. That was abruptly withdrawn six months later. One of the biggest problems banks have is ways of reducing their transaction costs. According to some estimates, each transaction would cost around Rs. 20 to 30 while some experts have shown with mobile banking and other IT-savvy methods, this could be brought down to less than a rupee. Operational costs of banks are high and run into millions of rupees – and if there is a way to cut costs to the bone, they should take it.

On one hand, banks say the cost of lending is higher compared to other countries. If so how is so much profit made? Rather than being pleased over profits which make shareholders happy but is a cause of annoyance to depositors who find their monthly interest income gradually falling, Sri Lankan banks should make a conscious effort to reduce costs (which is at the expense of depositors) and reduce the gap between borrowing and lending rates.

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