By Rusiripala Tennakoon –

Rusiripala Tennakoon

To dig the grave or not? A choice that needs extra caution! But in order to extend further support to a matter that is already in public focus, presuming it will not be an imprudent excavation, some of the historic facts remaining as bygones are referred to in this write up.

The year 1992 marked a watershed serving as a turning point in the operational affairs of the State Banks in Sri Lanka. The pandemonium started with an announcement made in the Parliament by a State Minister stating that a need arisen to Privatize the State Banks. The subsequent commotion this announcement caused soon became a country-wide issue among the trade unions, social groups and parliamentarians spreading across a wide spectrum, climaxing into a No Confidence motion debate in the House. This was followed by another bomb-shell dropped by the Minister of Finance stating that the two State banks were insolvent, to justify the stand of the government to privatize the State Banks.

This issue was finally resolved by the government deciding to recapitalize the two Banks, the People’s Bank and the Bank of Ceylon while continuing to retain 100% State ownership. The back ground to this hullabaloo was the seriousness of certain revelations made by two International Audit teams, Arthur de Little and Booze Allen Hamilton on these two Banks following an Audit by them under the direction of the World Bank. According to their findings Peoples’ Bank was undercapitalized by an amount of Rs.10,541 million and the Bank of Ceylon by about Rs.13000 million. In April 1993, the Peoples bank received restructuring Bonds amounting to Rs. 10541.0 Mn. from the Government of Sri Lanka for the identified purposes. The report highlighted the following details about this shortfall in respect of PB.

1) Rs.1152 Mn.       To achieve the capital adequacy requirement in accordance with CBSL guidelines;

2) Rs. 1700.5 Mn. To write off loans granted to Sri Lanka State Plantations Corporation & Paddy Marketing Board for Rs. 1407 Mn. and Rs. 233.5 Mn. respectively;

3) Rs. 4355.0 Mn  To finance pension liabilities (employees);

4) Rs. 3231.0 Mn. To provide for loan loss provision;

5) Rs. 102.5 Mn.    For loans  to be transferred to Special Recovery Unit (RACA);

Total  Rs. 10541.0 million

There was a similar list in respect of Bank of Ceylon shortages.

The agreement and the letter of conditions signed between the People’s Bank and the Treasury, included the following stipulations.

1. The above value of bonds granted by GOSL effectively relates to accounting entries that were booked to clear carrying values of advances granted under State recommendation, which were deemed as irrecoverable;

2. The agreement underlying the granting of these Bonds stipulated,

a) A tenor of 30 years, where the Bonds could be redeemed through the recovery of any of the specific loan losses for which the bonds were issued;

b) As per the initial agreement an interest rate of 12%would apply with half yearly payment of int erest;

c) A value of 25%of income derived from (b) above would be refunded to the GOSL annually;

3. As indicated a sum of Rs. 4355.0 mn. of this tranche of bonds was assigned Rs 3118.0 Mn, to the Pension Fund and Rs. 1137.0 Mn to the W& O P Fund. 

According to the carrying balance of Bonds reflected on the statement of Financial Position does not include the Pension Fund, which is managed as an Independent Trust Fund.

Accordingly; these bonds valid only till April 2023, ie. 30 years from April 1993 are to expire in April 2023.

The BOND receiving banks were required to take action to recover some of the loans specified under the agreement and use such funds to redeem these Bonds.

Now the issue is, have the banks recovered any sums from these overdue loans? If so has any part of such proceeds been used to redeem the bonds?

What will be the position of the shortfall in funds with the termination of the validity of these bonds? 

Have the Banks introduced measures not to allow a repetition of this state of affairs after this recapitalization exercise?

Do their subsequent performance indicate these developments?

While reserving our comments on these questions, an important concern of the people would be to know the fate of these institutions in the critical economic situation the country is facing and the publicized information about the huge and unprecedented accumulation of virtually unpaid debts of the leading State Owned Enterprises (Electricity Board, Petroleum Corporation and SriLankan Airlines often quoted by the authorities) financed by the State Banks. The growing uncertainties and the misgivings surrounding the claims to disown a percentage of the State in these state banks has confounded the situation.

The involvement of the IMF, their pressure on the Government to adhere to a restructuring program and the deteriorating operational issues exposed in the SOEs that owe huge sums due to the State banks will most certainly add to the liquidity threats faced by our banks. The instabilities faced by most banks in a Global scenario and the following merges and closing down of some no doubt will add to the confusion.

While the Government is under pressure to address these issues it is time that State banks too focus on these pending dangerous trends on their own adjusting to face the realities instead of playing Nero disregarding the great social and political change that is agreed to by all social groups, at these critical times in our country. 

It will be prudent for Chairmen and Boards appointed by the State, to examine their actual performances vis-a-viz the broader objects of establishing these important institutions, subject their accounting practices to more careful scrutiny to ensure that those at the helm of affairs are not misled due to window dressings resorted to by “Seetambara Pata Salu Weavers” with unscrupulous  maneuvers.