Two state banks to undergo specific reforms with new business models
Bank of Ceylon and People’s Bank are to undergo specific reforms with new business models and capital adequacy for the two state banks, the Finance Ministry announced this week.
It will be strengthening governance of all State Owned Banks (SOBs) – licensed commercial and specialised banks and strengthening the risk management architecture of SOBs.
This initiative of the government was highlighted in an article published in the Business Times on October 15, 2023 under the heading “Sri Lanka’s six state owned banks to undergo urgent reforms”.
These local banks need Rs. 1.4 trillion capital injection after bad loans increased to alarming proportions in the economic crisis and debt moratoriums as well as debt restructuring hit their balance sheets, it stated.
Bank of Ceylon, HDFC Bank, National Savings Bank, Pradeshiya Sanwardena Bank, Peoples Bank and Regional Development Bank are included in the SOE restructuring unit’s list of 31 state owned enterprises (SOEs).
With the IMF technical support and new funding, the Central Bank and the government will be better placed to grant capital injections if required to strengthen the banks, the Business Times news report quoted a senior high official of the finance ministry as saying.
Under IMF guidelines, weaker banks are likely to be merged into the stronger banks while: restructure of struggling state-owned banks is also considered as a possible option.
In order to protect retail investors from potential losses, the government will not seek to sell shares to retail investors in either of the banks (Bank of Ceylon/People’s Bank) until the bank has been profitable and in full compliance with all Central Bank prudential ratios for not less than two consecutive calendar years following the date of the cabinet decision, the finance ministry emphasised.
In any event, the government would only consider selling a minority stake in selected state banks, whilst the government retains the majority share ownership, as articulated in the 2024 budget speech, the finance ministry confirmed.
The ministry will be establishing a specialised unit under the Public Enterprises Department entrusted with responsibility for managing the state’s shareholdings in SOBs and to monitor and report on their performance.
The Auditor General has been directed to appoint qualified external auditors for all SOBs, and will enter into a Memorandum of Understanding to establish this unit as standard practice going forward.
With the consent of the Auditor General, all SOBs shall select new external auditors for the year beginning 1 January 2025 from amongst the auditing firms with substantial international footprint.
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