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Financial institutions under pressure to lend: A dangerous trend



In 2008, the housing crisis in the United States caused a global credit crunch that was felt all around the world including the US and the UK but also Russia, Ireland, Mexico and several Baltic states. The crisis was truly global, yet Sri Lanka was spared the worst effects of the crisis for various reasons primarily due to the regulatory structure which restricted exposure to high risk financial assets. The financial crisis did create issues for Sri Lanka’s exports, and, generally speaking, there was a drop in both the prices of and demand for commodities. Sri Lanka nonetheless survived the financial crisis and even thrived for a few years following the defeat of terrorism.

Yet, Sri Lanka may have another looming crisis and it is not the property ‘bubble’. While the property market is currently lacking in liquidity, there is adequate room for upward social mobility from the working classes and there is demand in many sub-sectors of the property market. Perhaps, there will be an oversupply of luxury condominiums sometime in the near future, but this too is a small market segment when compared to the property market as a whole. Further, the mortgage industry is also heavily regulated and banks generally discount the value of a property it is lending against.

Sri Lanka may however face more severe issues in the near future with the level of personal debt that many Sri Lankans have taken on. From the point of view of the financial institutions, unsecured credit card debt is perhaps the major threat to the stability of the system. As per a report from October 2018, Sri Lanka’s total credit card debt stood at Rs. 101 Bn. A report in April 2019 showed that total credit card debt had increased further to Rs. 109 Bn, which is an Rs. 8 Bn increase in 7 months. Since April 2019, the overall economic performance of Sri Lanka has suffered at least two major setbacks. First, the Easter Sunday Attacks, which created a dramatic drop in tourist arrivals, a major income earner for Sri Lanka and an industry that employs millions directly and indirectly. Second, just as the country’s economy seemed set for a revival, the Covid19 pandemic struck, affecting tourism specifically but virtually every other industry as well.

Many Sri Lankans had no choice but to resort to utilising any debt instrument available to them in order to make ends meet. There is little doubt that many Sri Lankans would have opted to utilise the available balances on their credit cards, plunging them further into debt with even higher interest rates and expensive penalties and charges.

Even if we assume that credit card debt in total would ‘only’ be around Rs. 120 Bn at this point in time, we have to also consider other forms of personal debt. Most mortgages are well secured due to the discounting requirements from the CBSL; thus even in the unlikely event that there would be a crash in the property market, most lenders will be well collateralised. This is not the case with credit cards, and exposure to the credit card sector is significant across banks of all sizes at all tiers.

Yet, this still only part of the problem. Consider personal loans, though quantums are smaller, the risk is high for the lending institutions as more often than not, personal loans are unsecured and usually borrowed for consumerist purposes. Most people in Sri Lanka buy durables including televisions, washing machines, etc., on consumer finance schemes, and again some of this risk is taken by banks and other lending institutions. The durable item will often be obsolete in a year or two, so any default is unlikely to be covered by the value of the goods. Education loans are another instrument which many consumers use to fund their educational pursuits or those of their children. Often these too are unsecured and only linked to monthly income. Thus, considering credit card debt plus other forms of unsecured personal debt, both Sri Lankan borrowers and the lending institutions might well be engaging in an unstoppable ‘snow-ball’ effect.

Against this backdrop, it is with some consternation that we note the comments made by the Minister of Industries Wimal Weerawansa, at a business conference, held at the BMICH, a few days ago. During the event he stated that he has “not seen such rigid policies when lending to entrepreneurs or industry like in this island” while also alluding to the annual profits of some banks which are over Rs. 3 Bn in some cases. Mr. Weerawansa did not, however, point out that Sri Lanka’s largest state bank, the Bank of Ceylon reported a loss of Rs. 300 Mn for the quarter ended June 2020. Sampath Bank saw its profits drop by 36% for that same quarter. Cargills Bank made a 64 Mn loss in Q2 2019 and the June 2020 quarter also saw non-performing loans (NPL) increase to 5.3% of total loans industry wide. This is all before the worst effects of the pandemic driven lockdown can be baked into the numbers. Indeed, many banking professionals expect further provisioning and write-offs in the coming year.

The Minister also stated that the banks in Sri Lanka were less interested in lending to industries. What he perhaps meant to say was that lending on industrial projects was restricted. However, economists agree that many of Sri Lanka’s major industries; tourist hotels, hydro-power, garments and other manufacturing related projects have all been heavily backed by bank finance. He went on to say that the CBSL “has developed a lot of monetary policy for the benefit of the bankers and not for the benefit of the clients…” This once again is a mischaracterisation of the structure of the system. Banks are run through depositors’ funds and the depositors are Sri Lankan citizens; it is their money that the banks lend with margins under strict guidelines. The CBSL’s main duty is to protect the hard earned money that citizens deposit in the banks.

It is very important that we understand the current predicament in its entirety before making such comments which are quite clearly meant to put pressure on financial institutions to lend more funds. Veterans of the banking industry are well aware that banks are one of the key drivers of economic activity in any economy, but more so in Sri Lanka where FDI has been lagging for many years.

The shareholders of banks do not own the funds that are being lent; it is the citizen’s deposits that are being lent. In basic terms, banks take funds as deposits; on demand, on short-term tenors and on medium to long term tenors. Banks must be cautious about lending funds even on a short term basis if their funding structure is tilted towards demand deposits. Capital adequacy will not be anywhere near enough if ad hoc lending strategies are given priority. A lender’s major task is to identify the borrower and their risk profile verses the steps that can be taken to mitigate risk. The important term here is to mitigate risk, not to altogether absolve yourself from the risk.

There are three broad categories of borrower:

1. Those who borrow with a genuine desire to repay

2. Those who borrow on the basis of repaying ONLY if the project or investment becomes a success

3. Those who borrow with the idea of not repaying no matter the circumstance.

Once you identify your customer and what category he falls into, you must then take a view on the risk proposition versus the profit motives and act accordingly. This is no easy task. At this current stage in our country’s recovery from the Easter attacks and the pandemic, increased lending even at lower interest rates can lead to serious instability in the system. In fact, the worst is likely still to come, considering that moratoriums are expiring at the end of September and the country’s economy has yet to show signs of a sustained recovery. Wages have fallen due to the lack of business activity, disposable incomes are non-existent, personal debt is on the rise, and non-performing loans are also increasing.

Yes, the banks in Sri Lanka have been very successful in the past and the industry is perhaps one of the most stable and dynamic in the country’s history. However, this is as a result of very carefully crafted policy and strict regulations. If anyone goes back a few decades to the height of terrorism in the nation, it is the banks that guaranteed some form of economic progress to the country’s people and its industry. Thus I urge the Minister and his colleagues not to be so brash as to think that the country, its people and its industry can survive and thrive on borrowings alone. The state and its institutions should provide a framework for success, beyond tax holidays and low interest rates. Consistency of policy, stability of currency, multi-stakeholder planning of key industries and attracting both FDI and foreign talent to the country are just some of the facets that must all come together before we start looking at enhancing lending portfolios to spur economic growth.


Rienzie Wijetilleke & Kusum Wijetilleke

– Colombo 7

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Covid-19 – a cause for grave world concern;



Some thoughts and reminiscences

By Dr. V.J.M. de Silva

There is no doubt about the gravity and world concern about this serious disease. Every newspaper devotes a lot of space to it. Intellectuals and world leaders talk about it. Unlike in past pandemics, it has spread even to Arctica and Antarctica – almost every country in the world is affected – (even Greenland, though no deaths have been reported). It is, however, not as bad as previous pandemics, like the Bubonic Plague of the 14th century, when nearly 50% of Europe was wiped out.

All information given herein is from the Internet and is up-to-date. In passing, I would like to mention that I am now 91-years-old and all this information was collected throughout the last several years. The world today is at a ‘standstill’ due to control measures taken. Nonetheless, I would like to present some facts which I think would give readers some food for thought. India, our nearest neighbour, has a population of 1,360,000,000 (1 trillion, 360 million – a little over 13 million). This is six times the population of Sri Lanka. From these statistics, we should have about 1 million cases and 20,000 deaths (not 9,000 cases and 19 deaths). The Maldive Islands, also a neighbouring country, with a population of 1,300,000, however, has 11,600 Covid cases and 37 deaths. The island of Villivaru has been turned into the ‘world’s first Coronavirus resort’ with 2,500 beds, where patients enjoy a luxurious stay and free medical care! (Wikipedia).

I will give a few facts for the sake of comparison with Sri Lanka. From this it appears that India has a mortality of 15%, the USA 3% , Thailand 8%

From this table, Sri Lanka seems to be the safest country in the world to live in today. Obviously, Sri Lankans seem to have some sort of immunity. Various explanations have been given for this immunity. The most plausible is that our children have all been given BCG immunization.

We have undergone, and are still undergoing severe hardships due to the measures that the health authorities have, understandably, taken. The problem is, the symptoms of the disease caused by the Covid-19 virus, is so common, that it is not easily recognized, unless the specific diagnostic test is done. The cases of the disease in India and the Maldive Islands have increased. As of the end of October, the cases in India have risen to about 790,000 with 119,700 deaths – 677,000 have recovered. The population in India is about six times that of Sri Lanka. Going by these statistics, Sri Lanka should have about 20,000 deaths, not nineteen as is the case.

Globally, there are about 44,000,000 cases and 1,165,000 deaths. The USA has the highest number of cases – about 6,000,000 cases with 240,000 deaths. The worst affected country seems to be Thailand, which has a death rate of 8% (i.e if 100 people get the disease, 8 will die ).

This immunity may be something similar to Yellow Fever. Although we have the insect vector, Aedes aegypti, which spreads yellow fever, no one in Sri Lanka has ever had yellow fever, though it is a menace in North and South America, and Africa. This mosquito also spreads Dengue. This is also a reminder of the Yellow Fever epidemics in 1900. The Americans, who were interested in completing the work on the Panama Canal (about 50 miles long and 100 ft. wide), connecting the Pacific and Atlantic Oceans, spent a lot on men and material. The Isthmus of Panama, separates North and South America. Several scientists sacrificed their lives doing research on the diseases preventing its construction. It has been called the greatest achievement of the 20th century.

In conclusion, I would like to quote the words of Max Theiler in his speech at the Nobel Prize banquet. “I like to feel that in honouring me, you are honouring all workers in the laboratory, field and jungle, who have contributed so much, often under conditions of hardship and danger, to the understanding of this disease. I would also like to feel that you are honouring those who have given their lives in gaining knowledge which was of inestimable value. They were truly martyrs of science, who died that others might live.”

Generous and gracious words, indeed. Would there be scientists like that today! Alas, they are no more!, That generation has passed away. If I may mention their names – the team was led by Dr Walter Reed, well known for his work on infectious diseases. Others were James Carroll, Jesse James Lazier, Adrian Stokes, W.A.Young, Hideyo Nagushi (a Japanese American) and a nurse, Clara Maass. They were all ‘martyrs’ for science.



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A bouquet to President and his team



It was great to see Valaichchenai producing paper once again. Thanks to President Gotabaya Rajapaksa and his team, including Minister Wimal Weerawamsa, officials of the Paper Mill and the armed forces that contributed to reviving the factory.

Two years ago, I spent a few nights at Bay Vista in Arugam Bay, I made a detour to see what was left of the Valaichchenai Paper Mill, one of my favourite haunts during previous visits to the area. The gates were shut, held firmly by trees and shrubs. I alighted from my car, walked up to the gates, and looked at that factory which had gone to rack and ruin. That saddened me beyond measure.

We were lost in the jungle, near Tantirimale, recently when motoring to the Sandamal Eliya temple to donate a wheelchair. I had known the areas previously, but could not find the way in an illuk (spear grass) jungle at Mahawilachchiya. That was where I had led the Agrarian Services personnel on a national mission to make the country self-sufficient in paddy, but new roads had come up. Finally, when we reached Sandamal Eliya, I inquired from Ven Sangarakkita about the illuk grass. He said it was a nuisance and nobody knew what to do with it.

On our way back, I happened to recall that originally the Valaichchenai Paper Mill machinery was intended to make paper from illuk, which is a stronger product than straw, and did provide both the long and short fibre needed for paper making. The Valaichchenai mill devoured all the illuk within a few years. All was thought to be lost, but thanks to the ingenuity of our engineers and scientists, another raw material was found. They discovered that straw could be used as a substitute. It was then that I came on the scene, going behind the straw lorries for miles on end on my way to the East. The straw provided only the short fibre, and we had to import paper pulp to mix with the straw. Even then we produced paper. The production came to a standstill due to LTTE terrorism.

The irony is that we, who found how to make paper out of straw, stopped producing paper, while China and India went ahead with paper making.

I have, in my papers, suggested that a few small paper mills be imported from China or India, set them up in Padaviya, Tissa and Mahawilachchiya, and turn our straw into paper. The cost of the paper machines and installing can be recouped in one year from the savings from the curtailment of paper imports. Actually, we need not import any paper, from the end of 2021, if the government imports three small scale mills, costing less than a fifth of the cost of paper imports a year.

An article I wrote about illuk was published in The Isalnd on 29 Sept. 2020, under the caption “Illuk can reduce poverty and save foreign exchange”.

The Divisional Secretary, at Kotmale, once set up a small industry to make paper out of waste paper. It was a great success. It is sad to note that Sri Lanka is, perhaps, the only country in the entire world that wastes its waste paper, not making paper out of it. Go about anywhere in Colombo and one can see people collecting waste paper and waste cardboard. We do not process it to paper. Instead we export some 30 tons of waste paper a month to India, and the ridiculous part of it is that we buy paper and board from India. Truly we need to have our heads examined.

I remember that a few youth on my Youth Self Employment Programme, in Bangladesh, were collecting waste paper to make paper and they earned a decent income.

Installing a small scale paper mill, at Sandamal Eliya, can be done in three months, working at the speed I did once in 1971 in establishing the Mechanized Boatyard at Matara. Then my team found how to make crayons with experiments done at the science lab of Rahula College, Matara. Sumanapala Dahanayake the Member of Parliament, at Deniyaya, in his capacity of the President of the Morawak Korale Coop Union, established the handmade crayon factory, working day and night, in two weeks, and that Coop Crayon Factory provided all the crayons we needed. Harry Guneratne, the Import Controller, cancelled the import of all crayons, and Coop Crayon flourished until President Jayewardene’s government closed the factory, in 1978. That was the “development” that the UNP brought to our country!

I can only hope this note will reach the President.

Ph D Michigan State University
Former Government Agent, Matara

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Mike Pompeo’s Predatory Diplomacy!



Are we now in the Predatory Era of diplomacy?

US Secretary of State Mike Pompeo has given us much food for thought on this. He has described China as a predator in relations with Sri Lanka. At the Joint Media briefing, with Sri Lanka’s Foreign Minister Dinesh Gunawardena, Pompeo said about relations with Sri Lanka that “US is a partner, China is a predator”.

 “We see from bad deals, violations of sovereignty and lawlessness on land and sea that the Chinese Communist Party is a predator, and the United States comes in a different way, we come as a friend, and as a partner,” Pompeo told a televised news conference in the capital, Colombo.

A predator is an animal that naturally preys on others. It is also a person or group that exploits others, such as sexual predators.

The predator is very much part of the socio-political trend in the US today, and Pompeo was obviously clutching this feeling. Coming here, representing President Donald Trump, who is in a largely dirty and unmasked electoral fight for the presidency, Pompeo could not have forgotten that more than a dozen US women came forward to accuse his boss, President Trump, of having groped them (an much worse, too) with headlines across the media labelling him as “Predator in Chief”.

The word predator is now widely acknowledged in the US to have racist overtones, and in the last election cycle, Hillary Clinton half-apologized for using it. She caught a break, too, as the predator label drifted away and stuck to her opponent, Trump, instead.

Way back in 1996, Hillary Clinton, in a speech supporting her husband’s 1994 anticrime bill, famously referred to a certain type of young person as a “superpredator” — a word coined by the political scientist John J. DiIulio Jr., who predicted that the nation’s inner cities would produce a generation of “radically impulsive, brutally remorseless youngsters” – the superpredators. 

It is up to the Chinese to take this non-diplomatic use of predator to describe the Chinese Communist Party, and therefore, China itself. Let’s look at the wholly racist trend in US politics and governance that has shown the predatory moves of its police and its supporters, such as President Trump.

Do we have to think a lot to recall how that non-white American, George Floyd, died after being arrested in Minneapolis, and held down by police officers, one of whom had his knee on Mr Floyd’s neck. He pleaded that he couldn’t breathe.

Protests broke out in cities across the US, and there were demonstrations in other parts of the world. ‘Black Lives Matter’ became a political organization with new power and meaning. The government of President Trump and Secretary of State Mike Pompeo have not had any success in having a good democratic response to the anger of the people about such racist violence. 

Can we forget, Breonna Taylor, a 26-year-old emergency medical technician, who was shot eight times when officers raided her apartment, in Louisville, Kentucky. They were executing a search warrant as part of a drugs raid, but no drugs were found.

It has now been officially found that no policeman has been charged for this brutal shooting – but there is a charge against one police officer for  bullets striking a neighbour’s apartment!  Predatory delight.

Mike Pompeo must know very well that Breonna Taylor became a rallying cry at protests in the US, along with George Floyd, and the many other non-white, Black American persons who have been killed by these Police and State Predators. He was certainly not thinking of how Black people are much more likely to be stopped and searched, and even rapidly handcuffed by police than white people in the US. Who are the predators, if not the Police? The State Predators of the US!

Foreign Minister Dinesh Gunawardena had already made his formal statement at this Joint Briefing, where Mike Pompeo came to his predatory trend in non-diplomacy. There was no opportunity for Minister Gunawardena to make any response, or is that so? Can a foreign guest, whoever he or she may be, insult a Sri Lanka friendly country in such a manner, with the least regard to proper diplomacy? Is the US in a special higher plane of international relations with Sri Lanka, than the other world power today?

Minister Gunawardena, in his diplomatic silence, may have been reminded of his father, the late Philip Gunawardena, whose move to politics here came after his studies in the US, where he became a socialist, moving with the leftist political groups there, who were in a rising movement against the capitalist powers of White supremacy.

He may have also remembered the Rubber-Rice Pact signed in 1952 when the UNP was in office, and saw the establishing of close relations with the People’s Republic of China, at a time when the US was in sway in global power.

Once he gets back to Washington, and sees Donald Trump reeling in the electoral fight with Joe Biden/Kamala Harris, he had better think more of the realities of predatory action in the US, and give thought to the possibility of the US being a ‘superpredator” in the world! 

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