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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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The lasting curse of Janasathu



Kataboola tea estate

Let me begin with two anecdotes.

In the 1960s, my father would pull into the local Shell petrol shed and a smiling pump attendant, smartly attired in a uniform (khaki shirt and shorts) would come up to the driver’s side and inquire what was needed. While petrol was being pumped, the attendant would wipe the windscreen and check the engine oil. The toilet was clean. The air pump worked. To my delight, large, colourful road maps were given out, for free. Sounds like a dream, doesn’t it? All this for about Rs. 1 (one) for a gallon of petrol!

The next anecdote. In 1978, I visited Brian Howie, a former classmate, at Kataboola Estate in Nawalapitiya. Brian was an SD – assistant superintendent – and his bungalow was in a remote corner of the estate, so remote that it had its own mini hydroelectric plant. Mrs. B’s government, which had nationalised the estate, had recently fallen and the estate was now under new management.

The bungalow was sparsely furnished, and I noticed that a corner of the living room was blackened. Brian told me that the previous occupant, a former bus conductor turned “SD”, had not known how to use the kitchen stove, so he put some bricks together and had created a lipa in the living room to do his cooking. Meanwhile, every appliance and item of furniture in the bungalow had been stolen by the same man.

Janasathu has a false ring, meaning “owned by the people”. But, as everyone knows, the term instead means a nest of thieves, running up millions in losses at the cost of the people. A place where friends and political supporters are given employment, showered with generous perks, and given a free run to plunder. Government owned corporations, companies, and “other institutions” run into the hundreds, and perhaps a handful make a profit. The rest are leeches, sucking the blood of the nation.

Do we need a corporation/board for salt, ceramics, timber, cashew, lotteries, fisheries, films, ayurvedic drugs, handicrafts? For a publisher of newspapers? They are so swollen with employees that their raison d’être appears to be employment, perks and plunder that I mentioned above.

I recently read that Sri Lankan Airlines, the CTB, the Petroleum Corporation, and the Ceylon Electricity Board are the biggest loss makers. The Godzillas among them appear to be Sri Lankan Airlines, which reportedly lost Rs. 248 billion in the first four months of this year, and the Petroleum Corporation, which lost Rs. 628 billion in the same period. (The Petroleum Corporations is owed billions of rupees by both Sri Lankan Airlines and the Ceylon Electricity Board.) The Ceylon Electricity Board appears to be a mafia, subverting efforts to promote renewable energy, while promoting commission-earning fossil fuels. While the poorest among our population are starving, the crooks that run these organisations continue to deal and steal.

In Hong Kong, where I lived for 20 years, no airline, bank, petroleum company, telephone service, LPG or electricity supplier is owned by the government. The buses belong to the private sector. In Japan, where I live now, in addition to the list from Hong Kong, even the railways and the post offices are privatised and provide a courteous, efficient service. In Japan, the service at petrol stations is reminiscent of Ceylon’s in the 1960s that I described above.

At least in one instance, Mrs. B attempted to correct her folly in nationalising plantations. The de Mel family owned thriving coconut estates in Melsiripura. After nationalisation, the estates declined to such a sorry state that Mrs. B personally invited the de Mels to take them back. Today, the estates are thriving under efficient management.

As a nation, we need to admit that janasathu has failed, and take steps to remedy the situation ASAP.


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Road to Nandikadal: Twists of Kamal and Ranil actions



I am re-reading retired Major General Kamal Gunaratne’s book “Road to Nandikadal ” these days. This is his first hand experience of the battle against LTTE, and his journey in the Sri Lankan army from Thirunelveli in 1983 to Nandikadal in 2009, where the final battle took place. Thirteen years have passed since the defeat of the LTTE in 2009 under the political leadership of former president Mahinda Rajapakse and the then secretary of defence Gotabaya Rajapakse. As we all know, Gotabaya became the president of Sri Lanka in 2019, and resigned last July, due to public pressure, and is currently travelling from country to country without a set destination.

In his book, Kamal has written an interesting chapter titled “A final chance for peace” and detailed the peace process followed by the then government led by Ranil Wickremesinghe, as the prime minister. This is Kamal’s narrative about the memorandum of understanding (MOU), brokered by the Norwegian government and signed by the then prime minister Ranil Wickremesinghe and LTTE leader Velupillai Prabhakaran in 2002. “According to the MoU, members of the LTTE political wing were allowed to enter government controlled areas to commence their political activities. The first group of such LTTE political wing members entered the government controlled area from Muhamalai, singing and cheering, as if they had won the war. They insulted and jeered at the soldiers manning the checkpoint with impunity whilst the poor soldiers, under strict instructions not to react, helplessly looked on. The Navy, which arrested a group of terrorists, was immediately instructed to release them. Upon release, the terrorists threatened the sailors and lifted their sarongs, baring their genitalia at the stunned sailors, who could do nothing but simply look down in shame. Such developments intensified the apprehension we held of things yet to come and prepared ourselves to face untold humiliation in the name of the Motherland”.

Kamal further writes, “At the time of drafting the MoU, experienced officers like myself, knew it was premature to enter into peace negotiations. On the one hand, LTTE could not be trusted to keep their word, as past experience had taught us bitterly, and on the other hand, negotiations should be ideally undertaken from a position of strength”. He continues, “The government of Prime Minister Ranil Wickremesinghe was very confident of the peace process and strongly believed there would never be a war again. They did not have any confidence in the Army, which spurred this belief and therefore pursued peace at any cost”.

Kamal’s criticism of the Wickremesinghe administration continues: “The step motherly treatment the Army received during this period was terrible. Strict instructions were given to cut costs and the ever obedient army reduced many of our facilities and benefits. The army even stopped the annual issue of face towels to soldiers, given as a benefit for decades. It felt like they wanted us to live like ‘Veddhas’ without a bit of comfort”

Now the same Ranil Wickremesinghe is the President and Commander-in-chief of the armed forces, and Kamal Gunaratne, who was highly critical of the Wickremesinghe administration, is the trusted Defence Secretary of the president. Is it a twist of fate or twist of faith!


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Need for best relations with China



(This letter was sent in before the announcement of the government decision to allow the Chinese survey vessel to dock at Hambantota – Ed.)

I once met Pieter Keuneman sometime after he had lost the Colombo Central at the general election of 1977. We met at the SSC swimming pool, where he had retreated since his favourite haunt at the Otters was under repair. Without the cares of ministerial office and constituency worries he was in a jovial mood, and in the course of a chat in reference to a derogatory remark by one of our leaders about the prime minister of a neighbouring country, he said, “You know, Ananda, we can talk loosely about people in our country, but in international relations care is needed in commenting on other leaders”.

Pieter, the scion of an illustrious Dutch burgher family, the son of Supreme Court judge A. E Keuneman, after winning several prizes at Royal College, went to Cambridge in 1935. There he became a part of the Communist circle, which included the famous spies Anthony Blunt, later keeper of the Queen’s paintings Kim Philby, and Guy Burgess. Eric Hobsbawm, the renowned historian commenting on this circle, wrote of the very handsome Pieter Keuneman from Ceylon who was greatly envied, since he won the affections of the prettiest girl in the university, the Austrian Hedi Stadlen, whom he later married. Representing the Communist Party in parliament from 1947 to 1977, soft-spoken in the manner of an English academic, Pieter belonged to a galaxy of leaders, whose likes we sorely need now.

I was thinking of Pieter’s comments considering the current imbroglio that we have created with China. Our relations with China in the modern era began in 1953, when in the world recession we were unable to sell rubber, and short of foreign exchange to purchase rice for the nation. The Durdley Senanayake government turned to China, with which we had no diplomatic ties. He sent R G Senanayake, the trade minister, to Peking, where he signed the Rice for Rubber Pact, much to the chagrin of the United States, which withdrew economic aid from Ceylon for trading with a Communist nation at the height of the Cold War.

Diplomatic relations with China were established in 1956 by S W R D Bandaranaike, and relations have prospered under different Sri Lankan leaders and governments, without a hint of discord. In fact, in addition to the vast amount of aid given, China has been a source of strength to Sri Lanka during many crises. In 1974, when the rice ration was on the verge of breaking due to lack of supplies, it was China, to which we turned, and who assisted us when they themselves were short of stocks. In the battle against the LTTE, when armaments from other countries dried up, it was China that supported us with arms, armoured vehicles, trucks, ships and aircraft.

It was China and Pakistan that stood by our armed services in this dire crisis. More recently, amidst the furore, created by Western nations about human rights violations, China was at the forefront of nations that defended us. A few weeks ago, it was reported that the UK was ready with documents to present to the UN Security Council to press for war crimes trials against the Sri Lankan military, but the presence of China and Russia with veto powers prevented it from going ahead with its plan.

It is in this context that we have to view the present troubles that have engulfed us.President Ranil Wickremesinghe, in the short period he has been in office, has won the sympathy of people by the speed with which he has brought some degree of normalcy, to what was a fast-disintegrating political environment. On the economic front, his quiet negotiations and decisions are arousing hopes.

A shadow has been cast over these achievements by the refusal to let in the Chinese ship to Hambantota, a decision made on the spur of the moment after first agreeing to allow it entry. The manner in which it was done is a humiliation for China, one administered by a friend. We must remember that these things matter greatly in Asia.

These are matters that can be rectified among friends, if action is taken immediately, recognising that a mistake has been made. The President should send a high-level representative to assure the Chinese leadership that these are aberrations that a small country suffers due to the threats of big powers, to smoothen ruffled feelings, and normalize relations between two old friends. The American-Indian effort to disrupt a 70-year old friendship, will only lead to its further strengthening in the immediate future


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