By T. Rusiripala
One of the main conditions attached to the economic reforms package recommended by the IMF for the resuscitation of the country’s economy is the transformation of the State sector enterprises to viable entities. The State Sector Banks occupy a prominent and significantly important position among them.
State banks are 100% owned by the government. Their capital comprise of Treasury allocated funds. Amounts involved are comparatively large. Hence any reforms required in the state sector enterprises should focus more importantly on the status of the State Banks and their performance.
All banks engaged in international commercial operations are required to fulfill certain international regulatory standards. In Sri Lanka in addition to this requirement banks are expected to follow standardization norms and guide lines given by the CBSL which is the regulatory authority for the banks in Sri Lanka. Maintaining certain Capital adequacy ratios is one of the main conditions that the banks have to meet under these regulatory stipulations initiated by The Bank for International Settlements which serves as the international regulatory body .Various accords are issued and revised from time to time by the Basel Committee on Banking Supervision, now known as the BCBS. BCBS provides guidelines and recommendations which have to be followed by the banks as applicable regulations in their banking operations. These regulations and recommendations cover several vital areas in the banking operations such as the capital risk, market risk and operational risk.
Such accords ensure that the financial institutions are adequately capitalized to meet all obligations including any unexpected losses. When the first Basel accord was issued in 1988 {Basel i} State sector banks were seriously confronted with a capital adequacy issue. So much so an International audit conducted revealed that the BOC and PB were insolvent. This catastrophe culminated as a no- confidence motion against the then Minister of Finance who pronounced that the two banks were insolvent based on the findings of the Audit reports. However the revelations established that the two State banks have failed to;
- Provide for the liabilities arising out of staff retirement schemes
- Make adequate provisions on account of non-performing loans
- Writing off bad loan portfolios
Amidst a huge opposition to a move by the then government to sell shares of these state banks and privatize them, the government finally resolved to provide required capital deficiencies in the form of long term treasury bonds and retain the banks further as State owned.
This was followed by another regulatory revision by the BCBS announced as Basel ii, to serve as an update of Basel i. Three main issues were addressed under this known as the three pillars for Bank survival, viz. minimum capital requirements, internal supervisory review of capital adequacy and effective disclosure measures to strengthen market discipline.
Thereafter following the 2008 financial crisis and the collapse of Lehman Brothers, BCBS proceeded to strengthen the accords further. An agreement was reached in July 2010in respect of the overall design of capital and liquidity reforms package. This came to be known as Basel iii. This last accord has come into operation with a gradual implementation process which began in 2013 and is expected to be fully operative universally by Jan 2019.
It is in this context that our State Banks are now planning to prepare themselves to fulfill this mandatory regulatory requirement. The CBSL under its supervisory guidelines is overlooking this. Some private sector banks have gone for debenture issues and other accepted remedial measures to meet any foreseen shortfalls in this regard.
Our State Banks appear to be following a laissez-faire course towards this accomplishment. Perhaps this may be due to their experience in the 90 s where the government came to their rescue providing required capital from the Treasury. The funds provided as re-capitalization bonds to the PB and BOC were for a period of 30 years scheduled to end in 2020. They were issued with several attached conditions by the Treasury under whose care and control the State banks then functioned. The State banks were expected to operate in a competitive environment in a level playing field and independently achieve whatever financial standings they were required to accomplish with autonomous operations free from political interference. But has this happened?
State sector banks were granted an autonomy to enable them to direct their operations in a competitive environment with others operating in the industry without being restricted to follow normal financial regulations applicable to other state enterprises. But it appears that this autonomy is much liberally used for other purposes and activities than for the purpose of improving business and increasing the market share. Today the State Banks depend completely on the facilities to the government for their profits. If a careful assessment is made one would observe that there is hardly any significant improvement in their lending activities to other sectors.
The situation that the state Banks had to face in the 1990s was identified as arisen due to certain known factors such as:
Political interference
High intermediation costs
Poor performance standards
Poor management skills
Inability to survive in a competitive environment
Unequal playing fields
If you take a closer look at the state Banks today, a similar situation prevails but not yet revealed as in 1990s where the revelations were made by reputed international auditors such as Brooze Allen & Hamilton – Arthur do little etc. etc.
The Government audit that is conducted annually will not reveal the shortcomings in the same way. The increasing liabilities towards ex-employees pension obligations, the inadequate and improper provision for non performing debts and the provisions for Bad debts all remain to be corrected after a proper assessment.
Huge advertising costs, utterly wasteful expenditure towards redundant exercises, have resulted in draining of funds to un-productive areas. In addition lack of a policy frame work for the state Banks to operate without engaging in unhealthy and unwarranted competition with each other is also causing financial losses and waste of funds. If the CBSL could provide a common platform for ATMs and other electronic and digital financial transactions much of unnecessary repetitions and wasteful investments could be stopped.
The Banks appear to be going on a freely spending expedition without any authoritative overlooking. This spree has provided the opportunity for spending millions of public money without much overlook and control. The autonomy granted for taking required measures to meet the needs of a competitive environment appears to be heavily abused in the leniency displayed by top level hierarchy’s in spending funds for many unproductive things.
The irony is the directorates are totally oblivion to the basic principles underlying the establishment of these state Banks. They have all deviated from the objectives of serving the class of people whom that were expected to consider in prime importance and help the country in the most needed poverty alleviation programs, rural co-operative movement and assistance required in the agricultural sector.
This is not a lapse or a shortcoming. It is a kind of crime perpetrated against the society that needs to be cared for and remaining neglected. All state Banks should be made to co-ordinate their services at the Finance Ministry or Presidents level, regarding their business affairs and development plans in a centralized manner without unnecessary and wasteful expenditures costing the already heavily debt burdened country.
All these expenditure plans should be carefully monitored so that any unscrupulous operations at a huge cost and the resulting wastes could be minimized. This will be a major step in the reformation of the banking sector.
The politicians under whose purview falls the state banks are using their positions in a care-free manner in flouting the principles and policies underlying many areas. They seem to be interfering in the lending activities as well as relaxing recovery procedures by favouring their henchmen.
The latest manifestation was the callous disregard to the recruitment procedure that should be followed by the state Banks.
During President Premadasa era a commission of inquiry was appointed to make recommendations about the youth unrest that prevailed then. One of the main recommendations made by this COL was that all recruitments to state institutions should be done based on the results of competitive examinations.
Recently in the BOC some interviews that were scheduled to be held following a written examination has been indefinitely postponed due to the intervention of the new Minister. Earlier a Chairman of the BOC had to relinquish office because he refused to make way to allow for political appointments to be made during the Rajapaksa era. These developments too will aggravate banks independence and the good governance practices and policies they are expected to follow.
