Connect with us

Opinion

Financial institutions under pressure to lend: A dangerous trend

Published

on

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

rienzietwij@gmail.com



Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Opinion

Becoming a water-wise citizen

Published

on

By Eng. Thushara Dissanayake

According to current demands and availability, potable water resources are rapidly depleting in Sri Lanka. Finding new potable water sources has become increasingly challenging due to the competition between irrigation water and drinking water needs in many areas. Population growth, industrial demand, pollution, and climate change exacerbate water scarcity more than ever. Despite this, society often overlooks the importance of water conservation, with water waste remaining widespread. As responsible citizens, it is high time to adopt effective water management practices at household and industry level for its sustainability. On the other hand, doing so will reduce the energy requirements for water treatment and distribution, helping lower greenhouse gas emissions.

According to NWS&DB only about 46% of the population in our country are supplied with pipe-borne water. Therefore, wasting water deprives others who really deserves fresh water but currently lack access.

Here are several common ways water is wasted presumably by users due to ignorance, along with effective strategies for reducing waste at the household level.Following are some other practical measures to save water.

Standard plumbing

Using standard pipes and fittings and skilled workmanship are crucial for preventing water waste, especially in embedded areas where such leaks are hardly noticeable. PVC pipes should not be exposed to the sun as that will deteriorate the quality of pipes over time leading to water leaks. Properly installed systems are often devoid of leaks and ensure efficient water distribution minimizing maintenance costs.

Selecting water-saving fixtures

There are many water-saving fixtures available today as low-flow showerheads, taps, and dual-flush cisterns having two flushing options. For instance, kitchen taps with fine mesh give the feeling that more water runs through it than the actual flow. Replacing the existing fixtures with these advanced items will reduce water usage significantly.

Fixing water leaks

If there are leaking taps or pipes in the house or business premises they should promptly be rectified. In addition, it is wise to have regular infections to identify such defects so that possible water wastage can be minimized.

Mindful showering habits

One mode of heavy water consumption at the household level is showering. Even small reductions in shower duration such as reducing the shower time by a few minutes can save many litres of water. Any habits of keeping the shower running while applying soap and shampoo should be avoided.

Using domestic appliances only for full loads

Making a habit of using washing machines and dishwashers only for full loads not only saves water but also reduces electricity consumption. Operating appliances at full capacity also enhances their efficiency and prolongs their lifespan while reducing repair costs.

Harvesting rainwater

Rainwater can be used for many household activities, especially for gardening, landscaping, and washing vehicles. Currently, treated water is often used for these purposes, which results in unnecessary treatment costs. Rainwater can be used even for drinking if properly collected, treated, and filtered for better hygiene. However, rainwater can be used for drinking after boiling if it is collected through a clean roof exposed to sunlight. Avoiding early rain is advisable to minimize the risk of impurities mixed with rainwater.

Gardening and landscaping

For hotels, public parks, playgrounds, and similar venues with extensive gardens growing native and drought-tolerant species that require less water can lead to massive water savings. This approach not only conserves water but also enhances landscape resilience during times of water shortages. Further applying mulch to retain soil moisture and installation of drip irrigation systems and garden sprinklers for watering can minimise water requirements. Watering the lawns should be done in the morning or late evening to minimise evaporation losses.

Water Recycling

Water from sinks, showers, and washing machines which are called “grey water” can be used for toilet flushing and gardening. By diverting grey water away from the sewer system and integrating it into these activities, freshwater requirements can significantly be reduced.

Awareness and Education

Making children aware of water conservation is crucial for fostering responsible water usage habits. At the domestic level parents and elder family members can be role models by demonstrating water-saving habits. As organization-level initiatives, educating children at schools, public awareness campaigns, promoting and giving incentives for water-saving appliances, and formulating sustainable water management policies are vital.

Adopting simple, yet effective methods as discussed can save water to ensure the sustainability of this scarce resource. As the adage goes, “Water is life”, every citizen has to be water-wise by understanding its value and actively taking steps to use water efficiently and responsibly.

(The writer is a chartered Civil Engineer specializing in water resources engineering)

.

Continue Reading

Opinion

Key takeaways from British election

Published

on

PM Keir Starmer

By Dr Upul Wijayawardhana

The fact that political parties splintered by internal strife, culminating in open warfare, would be punished mercilessly by the electorate at the first available opportunity is, perhaps, the key takeaway from the UK parliamentary election held on 4th July. Conservatives, who held power for 14 years were humiliated and reduced to only 121 seats, 9 fewer than even exit-poll predictions. However, exit-polls predicted the landslide for Labour spot-on, missing the mark by only two; Labour ending up with 412, prediction being 410. This Labour win was second only to the massive victories by Tony Blair in 1997 and 2001. Terms used by news media to qualify this Labour victory, tsunami and earthquake, perhaps, are inaccurate as both are unexpected events whereas this win was not. What surprised most, however, was not the Labour victory but the scale of the humiliating defeat of the Tories, losing 251 seats. This to a large extent, was self-inflicted!

Conservatives ended 13 years of Labour rule in 2010, but as they did not have an outright majority, winning only 306 seats in a house of 650, were forced to form a coalition government with Liberal Democrats who won 57 seats. In the subsequent election in 2015, Conservatives won 330 seats, just clearing the threshold of 326. David Cameron, who was PM from 2010, resigned in 2017 when the UK voted for Brexit in a referendum, which he forced on the country, hoping to get the opposite result. Conservative divisions bloomed following the referendum disaster and Theresa May, who succeeded Cameron, went for a snap poll hoping to get a larger mandate but was unsuccessful getting only 317 seats, forcing her to continue with a minority government. However, she too, had to resign in 2019 as the draft withdrawal agreement with the EU, she negotiated, was rejected by the parliament. Boris Johnson, who succeeded her, went for an election in 2019 and was able to secure a comfortable victory with 365 seats and it was the worst defeat ever for the Labour Party, which got only 202 seats. This catastrophe resulted because of Labour being out of tune with its own supporters, majority of whom were for Brexit whereas the party policy was to remain in the EU. This was a unique event in British political history where Labour supporters switched in droves to Conservative. Worsening internal strife in the Conservative Party and the blatant breeches of Covid rules, led to the ouster of Johnson in 2022, which resulted in the disastrous 45-day tenure of Liz Truss, shortest in British history. She had to resign in disgrace when the British economy tanked with the drastic economic policies she rushed through. Not surprisingly, she could not even retain her seat, which she won with a huge majority of over 26,000 in the previous election in 2019.

Most political analysts opine that the Conservatives lost the general election in October 2022, when their acknowledged economic competence was thrown into question with the antics of Liz truss. Rishi Sunak, who took over under the most difficult of circumstances, in addition had to face frequent backstabbing, mostly from a colleague also of Indian origin. He had the unenviable task of leading a badly divided party, on top of attempting to repair the massive economic damage caused by his predecessor. Although he could have gone on until December, he called a snap election and, ultimately on 4th July, faced the inevitable!

Perhaps, the humiliating defeat suffered by the Scottish National Party (SNP), which has its origins to the demand for Scottish independence, was even worse than that of the Conservatives. SNP once exercised virtually a dictatorship over Scotland, winning almost every parliamentary seat. It was humbled down to having only 9 seats, a loss of 39 seats, in spite of stoking the fire of nationalism by campaigning that this would be a vote for the demand of a second referendum for independence. The first independence referendum held in 2014 was lost, 55% voting against independence. Therefore, the most positive takeaway from the 2024 election is that it ensured the persistence of the union between England and Scotland. This clearly illustrates that a single-issue party like the SNP has a limited lifespan, a valuable lesson for some of the communal parties of Sri Lanka.

This election is remarkable in that, rather than being a Labour win, it was a Conservative defeat, as a detailed analysis of statistics clearly show. It had the second lowest turnout with only 59.9% of registered voters voting, the lowest with 59.4% being the 2001 election where the outcome, of re-electing Tony Blair’s government with a massive majority, was never in doubt leading to voter apathy.

In 2019, Labour got 32.1% of the vote, winning only 202 seats, which is considered Labour’s worst defeat. However, five years later, the share of the vote increased only to 33.8%, the increase being mostly due to a 19% increase in Scotland whereas there was hardly any change in England. Conservative share of the vote dropped from 45.6% to 25.7%. How can a mere increase of 1.7%, lead to a gain of 211 seats, Labour ending up with 412 of the 650 seats? The main reason for this is that Nigel Farage’s Reform party siphoned off a fair share of the Conservative vote in many electorates enabling Labour and Liberal Democrat candidates to win with small majorities. Reform got 14.3% share of the vote, a remarkable achievement for a new party. Farage, who started the chain of events that led to Brexit, took over the leadership of the right-wing Reform party immediately after the election was declared and threatened to take over the Conservative party ultimately. He may well do it unless Conservatives work out a robust strategy for revival! Wonder whether Farage got letters of thanks from the leaders of Labour and Liberal Democrat parties.

This is not the first time that the ‘First Past the Post’ (FPTP)electoral system, used in the UK, has produced paradoxical results. As Liberal Democrats were regularly getting fewer MPs compared to their share of the vote, one of the conditions for the formation of a coalition government in 2010 was a referendum to change the electoral system. However, the ‘Alternative Vote referendum’ held in 2011 ensured the continuation of FPTP as the Alternative Voting (AV) system was rejected by 67.9%.

Another big paradox of the 2024 election is Liberal Democrats gaining 64 seats, increasing their tally to 72 with only a 0.6% increase in the share of their vote from 11.6% to 12.2%. This probably will make them lose their enthusiasm for a change to a Proportional Representation (PR) system!

By far, the biggest paradox is Reform, which polled 14.3% got only 5 seats while Liberal Democrats, who got a smaller share, 12.2%, secured 74 seats! Reform is bound to clamour for change of the electoral system, with other minor parties, but the question is whether they would have a sufficient clout to bring about changes to the electoral system?

All parties in opposition clamour for a change but when they get power, completely forget about it, especially if they muster massive majorities. It is just like our Presidents, who promise to abolish the presidency during the campaign but, once elected and having savoured power, stick to it like leeches! Politicians, wherever they may be, behave the same way, subjugating everything to self-interest.

It looks very unlikely, in spite of all the anomalies, that the newly elected Labour government, which has a two-thirds majority in spite of having only minority support, would be interested in changing the electoral system, unless they start losing support quickly. This is not an impossibility, as they promised a lot which seemed almost impossible to deliver. They rejected Sunak’s Rwanda plan, which would have been a deterrent to illegal immigration and are now looking for a ‘Chief’ to solve the problem! PM Keir Starmer wants closer ties with the EU, which however is demanding free movement for the young but that would lead to an increasing number of immigrants; a very thorny issue. He has made some backers of his as ministers by appointing them to the House of Lords, in spite of having 412 elected members to choose from. The Lords is the chamber all parties never abolish despite their promises to do so as it is the place to accommodate cronies! I do hope, if a second chamber ever becomes a reality in Sri Lanka, it would not be like the Lords.

Even if politicians want to change the electoral system to PR or AV or even the French system of two-stage elections, which seems to have created a huge problem with the latest election, will the voters opt for change? Perhaps, not. After all, the best way to mercilessly punish politicians, in spite of all its disadvantages, is FPTP!

Continue Reading

Opinion

A different take on wind power projects in Sri Lanka

Published

on

A representational image

by Eng. Col. N. N. Wijeratne
(Retd)
Secretary General / CEO

Chamber of Construction Industry of Sri Lanka

Saudi Arabia aims to utilize her vast arid lands to harvest renewable energy resources and to increase her share of renewables to around 50% by the year 2030. This is similar to Sri Lanka’s stated goal of 70% renewable energy usage by 2030. However, sadly this is where the similarity ends.

Recently, the Saudi Power Procurement Company entered into two agreements with Marubeni Corporation of Japan to purchase wind power at a staggeringly low rate of 1.566 U.S. cents per kWh. Now compare this with Sri Lanka and the power purchase agreement with a foreign investor Adam Green Energy Ltd at 8.26 US cents per kWh. True, the government states that this will be the single most significant foreign investment in the country with a price of 1 billion US dollars and Sri Lanka will have uninterrupted electricity for the next 20 years, etc., and makes the convoluted argument that it is cheaper than thermal power which is 26.99 US cents per kWh and that the Ceylon Electricity Board purchases wind power from 9.67 to 13.99 US cents per kWh. Additionally, the power bought from Odamwadi solar project is higher in that it is 8.75 US cents per kWh unit. Be that as it may be, if competitive tenders were invited even in Sri Lanka a more competitive rate could have been possible keeping with the global norms. But this was an unsolicited bid negotiated by the Government high ups. Dr. Rohan Pethiyagoda has pointed out that for newly commissioned onshore wind projects, the global weighted average internationally for wind power is between 3.5 US cents per kWh to 3.3 US cents per kWh (2022 figures) and falling. In fact, in India the levelised tariff for wind power is 3.8 US cents per kWh. The very same investor is supplying wind power to the Indian power grid at this competitive rate.

This shrouded price has spurred Transparency International Sri Lanka to file no fewer than 11 Right to Information applications about this now cabinet-approved project that will come into fruition 2 years down the line and has questions regarding the legality, transparency, evaluation process, pricing, government involvement, and the environmental impact assessment related to 250 MW wind power plant in Mannar and the 234 MW wind power plant in Pooneryn. Additionally, it strongly raises an alarm about the ecological feasibility of these projects which are located in an ecologically sensitive zone and one in a Ramsar declared wetland sanctuary. The Right to Information has elicited a stony silence by the authorities and it is petitioned that the sovereignty of the people has been violated. If we take the pricing factor in isolation, it behooves the government to answer this call at least, keeping aside the energy policy and investor friendliness that the government talks about for this sector. Next question is do we need to buy wind energy in US$ for next 20 years? What justification is there to pay in US$ for our free wind. Capital investment by the developer could have been treated as a loan repayable at a reasonable interest rate.

Geopolitical considerations may have influenced India to be involved in our power sector in order to ward off Chinese intrusions, but there are questions both big and small that require answers for it appears that the people’s sovereignty is being trampled and they have a right to know.

Continue Reading

Trending