Sri Lanka state banks have to find own capital, be efficient: Minister

ECONOMYNEXT – Sri Lanka’s state banks will have to find capital without public help, become more efficient and enhance governance, Deputy Minister of State Enterprises Eran Wickremaratne said.

"Our government has a fiscal deficit and this deficit will not go away in a hurry," Wickremaratne told a financial sector reform forum.

"As a result, the government will be constrained in injecting capital to state institutions and the financial sector. Therefore, you will have to look for capital and internally generate capital."

"You may have to do lots of other things including the disposal of assets, raising capital and then of course increasing the efficiency of the capital that you are employing."

Deputy Minister Wickremaratne said new ways of using state banks for deficit finance had been used in the recent past.

"How do we minimise political lending? When you use the word political lending you are thinking about banks giving loans to politically related parties," Wickremaratne said.

"But I am also referring to what happened more recently, where state banks borrowed on behalf of the government, putting the state banks at risk."

"This is the legacy we have inherited from the previous regime."

Sri Lanka’s state banks were twice capitalised with people’s money in the 1990s after big borrowers and state enterprises defaulted.

People’s Bank and Bank of Ceylon were later reformed, and the former Treasury Secretary then started a practice of giving Treasury guarantees for politically directed SOE lending, protecting the banks.

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However, analysts say a practice of giving loans by ‘comfort letter’, which may be aimed at circumventing a fiscal responsibility law, has recently started again.

Around half of the assets of large state banks like Bank of Ceylon is loaned to state or state enterprises according to rating reports. (September 02/2015) 

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