2nd June 2000
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Clean suited young banking executives took to 
the street last week hurling ugly slogans, 
in a demonstration that was clearly alien to them. 
In an unprecedented display of unity 
Sampath Bank's entire staff voiced their hostility 
towards a possible takeover by Hatton National Bank, 
in a series of protest campaigns outside the bank's 
premises in the run up to its Annual General Meeting. 
The streets of Colombo were plastered with posters 
in a bid to involve the masses in what employees 
see as a corporate raid.

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Tariff hike rocks local cement trade

By Mel Gunasekera
An overnight decision by the Finance Ministry last week to raise import duties on cement and cement clinker, rocked the local cement industry threatening to shoot prices sky high.

Under a gazette notification, a 25 percent duty was slapped on imported cement (up from 10 percent), and a 5 percent duty on cement clinker. However, duties on Indian cement imports were reduced to 9.5 percent and Indian clinker imports to 4.75 percent.

The duty hike would favour local producers — Puttalam Cement and Tokyo Cement, and newcomers — Larsen & Turbo (L&T) and Gujaraat Ambuja, traders said. 

L&T and Ambuja, have set up bagging plants in Sri Lanka using Indian cement imports.

With India having an excess cement supply, there was speculation that the duty hike in favour of Indian imports was part of the 'strings attached' to the recent US$ 100 mn Indian loan. 

However, a Treasury official dismissed the idea, saying the government's aim was to protect local industries. "We had to reduce the duty for India, as part of the Free Trade Agreement," the official said.

At present around 80% of the cement is estimated to be imported from outside India (mainly Thailand, Malaysia and Indonesia) and prices of these cements are expected to increase significantly. 

Companies like Seneviratne & Co., and International Cement Traders have set up bagging plants using Indonesian and Malaysian cement. With imported cement prices tipped to rise to around Rs. 350 from the current Rs. 225 levels, these companies in particular feel their brands will be edged out by the 'big four' established players. 

"We have nearly 1,000 workers indirect and direct. Their jobs are at stake," Seneviratne & Co. General Manager, T T Gunasinghe said.

Cement prices will also rise in the following weeks with traders also factoring the 4 percent rupee devaluation. Local manufacturers will also raise their prices to cover the recent fuel costs. 

Meanwhile, Puttalam Cement Managing Director Martin Foreman said the 25% duty would level the playing field. "It eliminates the distortion of marginally cost imports. It is not protectionism. Protectionism is when it purposefully tilts the level playing field towards the domestic producer. 

"I don't support protectionism, but I insist on a level playing field. The soundness of this policy moved by government has my full support — a new distortion has emerged with the preferential duty being conferred on Indian imports," he said. 

There is a huge concern that the increase in duty will precipitate a price increase. Puttalam Cement does not subscribe to that in theory or practice, Mr. Foreman said.

"Yes, we do have to increase prices. Energy, which is 70% of our cost, recently doubled in the last two weeks and the devaluation of the rupee clearly affects our costs. We acknowledge our role within the Sri Lankan economy and our stewardship that flows from our being the market leader. Our prices will not sky rocket. They will move in a realistic and modest manner," he said.

However, excess supply continues to threaten the market. Excess capacity in 1999 was estimated at around 360,000 MT and is expected to widen to 450,000 MT by this year. 

With excess supply conditions expected to widen over the next two years, the protective tax was slapped on imports to cushion the margins of local manufacturers and level the playing field, traders say.

Meanwhile, the future of several direct importers and bagging plant manufacturers hang in the balance. The demand for cement has slowed recently as most state funded construction projects were put on hold due to the present war footing situation. The tax hike will also dash hopes of cheaper cement prices in the future.

Inland Revenue jumps the gun 

By Dinali Goonewardene
A past president of the Sri Lanka Institute of Taxation (SLIT) has alleged that the Inland Revenue Department collects taxes it is not legally authorised to do. 

SLIT past president C.P.E Gunasingam said the Withholding Tax Bill incorporating the budget 2000 amendments had not been certified by the Speaker and was therefore not an Act, although the Inland Revenue was collecting the tax.

The budget 2000 extended the scope of withholding tax to cover services rendered in the course of any business. 

However, Inland Revenue chief O.M Weerasuriya claimed that withholding tax was not an additional tax, but merely an administrative measure and would be allowed as a credit against income tax payable anyway.

Gunasingam also said the National Security Levy (amendment) Bill too had not been certified by the Speaker and was therefore not a legally binding Act. 

"The 1% increase in NSL applicable from May 11 is only enforceable by the Inland Revenue Department 30 days after it becomes an Act," he said. 

However, advertisements placed by the department did not highlight this and only said the standard NSL rate which was 5.5% was increased to 6.5%, effective from May 11.

However, Weerasuriya said it was for the taxpayers' benefit that the department was collecting the tax now. "If we suddenly collect a large sum for a period that has passed, the tax payer will complain," he said. 

"It also works for both sides of the coin. We allow medical insurance payments to be deducted now as required by the budget, but the Act has not been passed," he said. 

Meanwhile, the Customs Department has also begun implementing the NSL amendment even before it becomes a law with the Speaker's certification. The Customs Department too is not releasing goods if the additional 1% NSL is not paid. 

However, the NSL amendment grants immunity to the Director General of Customs for the collection of taxes between May 11 and the date the Act is passed. "The Director General of Customs is hereby indemnified against all action civil or criminal in respect of such collection," the amendment states.

NSL was first introduced through an Act of parliament in 1992. 

Special TBill auction

In the first of a series, the Central Bank last Friday had a special treasury bill auction for Rs. 1 bn. 

There were no three month bills on offer, instead Rs. 500 mn each was offered for a 179 days (six months) and 361 days (12 months) bills.

The yields were 12.45% (six months) and 13.09% (12 months), slightly higher than Wednesday's auction of 12.26% (6 months) and 13.01% (12 months). I

ncidentally, the 12 month yields are the highest since December 1998. Fridays auction was in addition to the usual weekly Wednesday auction. 

The special auction is part of the additional Rs. 10 bn the government hopes to raise as part of its recent revenue enhancing measures. For the third consecutive week, no treasury bond auction was held. However, a Rs. 1.5 bn two year bond auction was held on Friday in lieu for July 3. The weighted average was 13.63% as against 13.11% for two year bond, auctioned on June 1. 

CSE Chairman retires

Securities and Exchange Commission Chairman Wimal Hettiarachchi retired from his post last Friday after a three year term. Dr. Hettiarachchi was a former Director Economic Research Central Bank and alternate director to the International Monetary Fund. His successor is yet to be annouced.

Sampath wins round one

SEC says

Securities and Exchange Commission Director General Dayanath Jayasuriya commenting on the Sampath Bank saga said that the SEC had received complaints that parties acting in concert had exceeded the threshold limit of 30% in terms of the Takeovers & Mergers Code. 

He said the SEC acting within its mandate of protecting investors was investigating whether the Takeovers & Mergers Code 1995 and the SEC Act No. 36 of 1987 as amended had been violated.

"Upon the completion of the investigation, if there is material to substantiate that parties acting in concert have in fact incurred a requirement to make a mandatory offer, the SEC will take steps to ensure due compliance with the Takeovers & Mergers Code 1995," Dr. Jayasuriya said.

The much hyped Sampath Bank Annual General Meeting (AGM) took an unexpected twist, when the AGM's Chairman and Chairman Sampath Bank, Edgar Gunatunga ruled that the new majority consortium could not vote. 

In a counter move, HNB chief Rienzie Wijetillake wrote to Mr. Gunatunga asking the AGM to be cancelled, since a court order prevents nearly 30% of their shareholders from exercising their rights.

Meanwhile, at the outset of the meeting a shareholder, G.H Manamperi raised a preliminary objection based on the Takeovers and Mergers Code, that Stassens Exports, the Distilleries Company, Hatton National Bank (HNB), HNB EPF, Smart Development (Pvt) Ltd., Masons Mixtures, M U D E Silva, D N Daluwatte and P S Don were acting in concert to hold over 35% of the share capital and must make a mandatory offer to the remaining shareholders. 

He said a nominee of the persons acting in concert should not be appointed to the Board of Directors of the company and shares could not be transferred or voting rights exercised until a mandatory offer document is forwarded to the Bank's Board, according to the Takeovers and Mergers Code. 

Gunatunga said that with the exception of Mason Mixtures and P A Don, an examination of the purchasing pattern and control of the other parties mentioned proved they were acting in concert and an offer should have been made to the Board. 

"My opinion is backed by legal opinion. I uphold a point of order," he said, to the sound of resounding applause from the shareholders.

But conspicuous by their absence at the AGM were the new majority consortium. 

When shareholders were asked to nominate the directors put forward by the majority shareholders, there appeared to be no one willing to do this. 

The old Sampath Bank directors were voted in unanimously. "We were not allowed to go into the meeting," HNB Chief Rienzi Wijetilleke later told The Sunday Times Business. "Genuine shareholders were not permitted inside to vote and we will now check the legal validity of this meeting," Wijetilleke said. "Are we going to allow Budhist monks to run banks?" he questioned, referring to the sea of safron robes that engulfed one third of the hall, to which a restricted number of shareholders were permitted to enter.

Voting at the AGM was on a show of hands, of those present inside the hall. 

However, provision had been made to accommodate a poll based on shareholding. This would have involved the hundreds of shareholders mulling outside the meeting room, but none of the shareholders inside called for such a poll.

However, a court interim injunction last week, restricted HNB, HNB EPF, the Distilleries Company, P N Daluwatta and M U D E Silva who held around 34% of voting rights to 10%. This would have restricted the HNB/Stassens combine to 24%, while Sampath Bank's directors have accumulated 37% of proxies. 

Legal experts inferred that the majority shareholders absence from the meeting could be a calculated move to have it declared invalid.

Meanwhile, SEC who are investigating whether the Takeovers and Mergers Code has been breached, has not reached its verdict. 

"The SEC's decision not to halt trading in the meantime has resulted in minority shareholders being ripped off by sophisticated investors," former regulator and Partner, Nithya Partners, Arittha Wikramanayake said. He was referring to the fact that Sampath Bank's shares had been trading at levels far below those at which the mandatory offer would become effective. 

Mind your business

Our interest is in you
By the time this is read, the tussle between the sons of the soil and their partners in progress would have ended, one way or the other. 

But what this episode really proved was that the watchdog was all bark and no bite and that as long as any Perera, Pieris and Silva could buy shares off the market, no company would be safe from a take-over. 

And that possibility has sent alarm bells ringing in another major bank which feels they may be the next target. Their management has already asked that purchases of their shares be monitored closely to prevent a situation where they would be too late to take remedial measures. If not, they feel, someone may soon be saying, 'our interest is in you...!'

A poll raise
With all prices on the rise, the powers that be have decided at long last that some redress must be given to the masses — or else, there may be disastrous consequences to face at the polls which are around the corner. 

So, the boys in the Treasury have been asked to study the feasibility of a wage hike. But that shouldn't raise too much hopes — it's likely to be about ten percent of the basic salary, and subject to a maximum of about a thousand rupees too...!

Entice them or perish
The cost of living is rising and so are the dollar and inflation — and the only rates that are declining are the charges levied by hotels. 

Several hotel management companies met recently to discuss the crisis and there was consensus that they should revise rates and entice locals or perish — people it seemed, had less expendable income now, owing to the various price hikes. 

Therefore there will be further discounts, bargains and special packages designed for locals even in star hotels in the very near future, so fun lovers must watch out...

Is the devaluation a remedy? 

The devaluation has disturbed everybody. And everybody is talking about the devaluation. Some like it, others hate it. At least everybody is now aware that the country is facing a serious balance of payments problem. This has come as a shock to most, partly because the deteriorating conditions were masked by talk of a higher growth rate and the recovery of exports and partly because the growing crisis began galloping in the last month or two. The all important question to ask is whether the devaluation and a likely further depreciation of the currency could solve the immediate problem we face and improve our balance of payments? 

A devaluation is expected to improve a country's balance of payments position in basically two ways. It is expected to cut down imports by making them dearer. At the same time it is expected to increase export earnings by increasing export volumes by decreasing our export prices in comparison to those of other countries. A third expectation is a capital inflow. There could also be different expectations in the short run and the long run. We are at the moment particularly concerned with the short term effects as a relief in the balance of payments situation is needed very quickly. 

Whether these expectations would materialise, depend on the extent of the devaluation and to a greater extent the structure of a country's imports and exports. These factors are analysed by economists in terms of various elasticities. In simple terms elasticities are the responsiveness of demand or supply to changes in prices primarily. So the question to ask is whether the reduced prices for our exports in foreign currencies would increase the demand for our export items. And if they do increase, would the increase in export volumes be sufficient to compensate for the reduced prices. If the reduced export prices in dollar terms leads to a more than commensurate increase in export volumes, then our export earnings would increase and have a favourable impact on our balance of payments. There is a further condition of importance too to be satisfied. That is whether we are in a position to increase the supply of the goods demanded abroad adequately to make up for the reduced prices. 

Unfortunately Sri Lanka's exports are unable to fulfil these conditions owing to several reasons. First our agricultural exports, especially tea has an inelastic demand. By reducing prices we cannot increase export volumes appreciably nor can we increase production of these agricultural products like tea in the short run. In the case of rubber even if we could increase exports somewhat, we are a very small producer and therefore a price taker. The positive effect that the depreciation would have is an increase in export earnings in Rupee terms and therefore enhanced incomes, not an improvement in foreign exchange earnings as a result of the devaluation. 

When we turn to our industrial exports we find that they have a high import content. Therefore the devaluation will affect the costs of production too to a substantial extent through higher input costs. Consequently export prices can be reduced by a depreciation of the currency only by a small extent. Where exports have a larger domestic value addition they could become more competitive. But these exports are relatively few. The impact of the depreciation could be more beneficial to the economy in the long run, by improving the competitiveness of some of the higher value added imports. The bottom line in as far as exports are concerned is that they are not likely to bring in any substantial gains to the balance of payments immediately. 

In the case of imports the situation is clearer. It is difficult to identify any significant imports which would be curtailed owing to a 5 to 10 per cent price increase. It is unlikely that rice, wheat flour or sugar imports would be drastically curtailed. They are essentials which most consumers would continue to purchase despite price rises of 5 to 10 per cent. It is unlikely that imported milk consumers would curtail their milk consumption either to a significant extent. In any case total food imports last year constituted only 11 per cent of our import bill. All consumer items together amounted to only 21 per cent of our imports. The bulk of our imports were intermediate items or raw materials. These intermediate items accounted for 51 per cent of our imports last year. Most significant among these are the crude oil imports and imports of textiles for the garment industry. In 1999 when crude oil prices were relatively low, petroleum imports absorbed about 7 per cent of our import bill, while textile imports constituted 21 per cent of total imports. This year the quantum of oil imports had to be increased owing to the need for higher thermal power generation. Prices have meanwhile doubled. Crude oil imports are likely to absorb about 15 per cent of our import bill or more this year. It is neither possible nor desirable to cut textile imports. Many of the other imports in this category too fall into the same mould of not being able to be curtailed. Therefore the depreciation of the currency is not likely to reduce intermediate imports, in fact these imports are likely to rise this year. This is in fact a good part of the problem. 

The other very significant item which is creating a problem are the enhanced expenditure on armaments. Again this is an item independent of the devaluation. If these imports are to be in the region of US dollars 800 million as suggested, it constitutes about 14 per cent of last year's total imports. 

Therefore it appears that our Petroleum and armaments imports would constituted nearly 30 per cent of our import bill, therein lies the problem. Our analysis suggests that it unlikely that we could off-set such a large increase in imports by either a rise in exports or the curtailment of other imports through a devaluation. We are not suggesting that no import items would be curtailed. Certainly there would be some drop in consumption in many imports .Yet these would be insignificant to correct the balance of payments difficulties we are facing. The large items of imports will continue to be imported despite the current devaluation. 

What are then the benefits of the devaluation on our balance of payments? Some of our exports which were losing their competitive edge would be benefitted by the exchange rate depreciation. Exporters would increase their earnings and this may result in an encouragement of certain exports. Corporate profits of export oriented companies would increase and perhaps contribute to higher capital formation, with long run benefits. But long run beneficial impacts in particular are dependent on a host of other factors which economists assume away by the magic phrase ceteris paribus (other things remaining the same). 

Regrettably our analysis leads us to the conclusion that the devaluation is most unlikely to bring us out of our immediate balance of payments problem. We would no doubt have to borrow from international organisations to tide over the difficulties. Perhaps the devaluation was a pre-condition, a "conditionality", as they like to term it, to such balance of payments support. The devaluation was perhaps inevitable given our deteriorating circumstances and yet it fails to solve the fundamental problem. 


DFCC - new look, new resources

Mr. Nihal FonsekaThe DFCC Bank promised to deliver by mid year and they have. Last year the international consultancy, PriceWaterhouse Coopers spearheaded a restructuring of the bank identifying five key areas amidst some criticism for the stiff payment for their expert advice. But the biggest change the bank went through was the departure of their legendary CEO, Mr. Maxi Prelis who retired to make way for another big name in banking, Mr. Nihal Fonseka who left a top slot at HSBC to take over the reins here. Six months in the saddle, Mr. Fonseka says he has made a comfortable transition from commercial banking to development banking and has infused some of his expertise into the bank. Among the bank's future tasks are to expand credit lines and further improve risk management. The Sunday Times Business spoke to Mr. Nihal Fonseka of the restructured DFCC Bank's progress under his stewardship and future plans.


DFCC bank's profits reduced by 21% from the previous year to Rs. 530 million.

- The main reason for the performance reversal after two years of improvement to profitability was the provision of Rs. 412 million for possible credit losses and Rs. 211 million for possible investment losses and the increase in the level of non-performing advances on which interest income was recognized on a cash basis, their annual report says.

At last Friday's AGM, DFCC's board of directors was relected.Board memebers are; E.M.Wijenaike, chairman, T.Caglayan, C.A. Coorey, G. Fernando, A.N.Fonseka, G.A.E. Gunathilleke, S.C.Jayanetti, Savitrhi Jayasinghe, T. N. Jinasena, M. L. Mack, and M R. Prelis.,

The ownership structure has also been changing in the recent past with high net worth individuals buying into the bank. 

By Ruvini Jayasinghe
PricewaterHouse Coopers was here last year to advice on the restructuring of the bank. Your annual report says that key positions in the new structure will be filled by 2000? Are you on target?

NF: What Price Water house wanted was the restructuring to look like a typical investment banking cum commercial banking structure. They identified several key positions.

One was the traditional lending business, as a key area. They also identified another key area on the support side, which was also existing - our finance function. Those two were already there. To go forward PWHC suggested other key lines to be headed by executive vice presidents, which are second level of management below the CEO in respect of investment banking and corporate finance.

Operation or support services and also for Treasury. Those were the five key lines which they suggested that the bank should organize itself into.

However as DFCC had a lot of relationships and investments made over time because we were taking positions in equity, we had a special relationship with some companies where we had a significantly large stake, PW felt that there should be someone at EVP level who concentrates on these equity holdings and also in our associates and subsidiaries. As you know, we have Namal, Lanka Ventures, the Industrial Park and Commercial Bank and so on.

So the key jobs at executive vice president level that needed to be filled, for which resources were not available within were the Treasury and the executive vice presidents operations. And we also needed to strengthen our IT function as well as marketing.

The outgoing CEO and I made a decision that the treasury function need not be at executive vice president level, in the foreseeable future but at senior vice president level, because it had not grown enough. In the support area, another key area where we had to work on was the marketing. Now DFCC, did not have a dedicated marketing function which also evolved as a result of the PWC study.

External recruitment were primarily for vice president marketing, executive vice president operations/services, information technology, and treasury, the latter at senior vice president level

We felt the need to bring together the treasury and the resource mobilization function and have a senior vice president to look after that initially. The marketing position was filled late last year and the other three were done after I came and now all of them are on board.

(The new appointments are; Mr. Dhammika Kalapuge, Marketing, Mr. Dhirendra Abeyratne- Treasury, Mr. Sidath Wijeratne - IT, Mrs. Marina Tharma–ratnam Operations)

If there is a need to recruit a specialist in the future it would be to our corporate finance division depending on how, the market develops.

Profits in the last financial year (March 2000) have decreased 20% due to heavy provisioning on non performing advances (Rs. 623 million)? Why?

NH: Basically there are two sectors which did cause us some difficulty in the last financial year. One was the domestic textile manufacturing sector, where there was a relief package which the government announced in the previous year. DFCC had taken credit in the previous year, which had to be reversed in the last year, to meet the regulatory requirements in relation to recognition of income.

Government has basically assumed the liability to meet those obligations through the Textile Debt Restructuring Fund. (TDRF)

But there is some delay in the servicing then and under the Central Bank guidelines on recognition of income we had to reverse some of the income which we had recognised from the previous year as well as we had to stop accruing income for the current year. The total loan amount involved there was about Rs. 550 million.

Now there was an added complication that arose. In the last quarter of this year (January to March 2000) it became apparent that in respect of those two debts, we may not get the relief from the government. That amounted to about Rs. 130 million, which we had to recognize as something which might not receive government assistance. So we had to make provision for that. Of that too, there is a possibility that one might qualify in the future; but that is uncertain.

The other debt have now been transferred to the TDRF and agreements have been signed and government is continuing to service them but unfortunately there is a delay. Therefore we cannot recognize the income on an accrual basis. The government will repay in instalments over a ten-year period. Therefore about Rs. 57 million of interest income has been suspended as at 31st March 2000, which we could have taken into profit had the advance been performing, but we cannot until we receive it in cash.

As a defacto sovereign debt there is no risk of loss. But for regulatory purposes we cannot treat it any different to other debts.

Is this your major exposure, which affected your bottom lines?

No there are two hotels where we had to make provisions largely because there were certain bridging facilities we gave to these hotels on the basis that they would raise it in the market. But unfortunately the market conditions changed since then. So these hotels are saddled with an unanticipated level of debt for a longer period which has caused them problems in servicing them. There are ways and means of exploring as to how to bring this debt servicing down. So there again a certain amount of provisioning needed to be done.

Another area which provisioning had to be done was in the prawn farming market. There again the total credit exposure involved was about Rs. 500 million. But things are looking better for the sector at the moment.

The point I am trying to make is that the apparent increase in our non-performing assets are actually attributed mainly to specific advances and is not due to a weakness in the overall portfolio itself. Thirty clients accounted for approximately 60% of the non-performing portfolio, which is at Rs. 3.5 billion.

But most of these businesses are still running.

The problem is that the level of debt they are carrying now is difficult to fully service because they expected to come to the stock market for capital, but poor market condition have prevented them from doing so.

Quite apart from that what we have done this time is that we have looked at some exposures where we have provided beyond need not go by the Central bank's minimum provisioning requirements.

We have looked to see whether there is a high risk that we will not recover and if that is the case we have provisioned for 100% There are instances where the regulatory requirement is only 50% but we have provisioned 100%. To my mind there is no point in delaying the day of reckoning. Just because the regulation allows it, there is no point in under provisioning a totally non-performing loan where there is little or no prospect of recovery.

What is the status of the bank's funding resources? n Are you looking for new funding avenues?

Up to now the bank has been predominantly dependent on funding from multilateral. The last major facility we drew down was the Floating Rate Note which we floated in the international market with an ADB guarantee, We have negotiated another 60 million douche marks with KfW and now all the paper work has been done and that is available for drawing.

So in the next 12 months there is no real issue on the funding side. 

But we have recognized for some time that there is a need to diversify our funding base. Because now there is a reluctance on the part of the government to extend their guarantee and exchange risk cover because they now feel the bank is mature enough to stand on its own.

We need to develop alternative funds. How to do it is something we are at the moment debating. Fortunately we have the luxury of not being with our back to the wall and we have some time to formulate a strategy and implement it. One way of doing it is obviously to go to the international debt market, and through some sort of a swap convert that into rupees. Another option is to tap the wholesale deposit market.

The third option is to issue our own paper. There is also the option of raising deposits from the market. We have not done that so far in a very organized way. We have been looking at deposits over Rs. 5 million basically targeting the high net worth individuals and corporates but, not on a very proactive basis. We can also securitise some of our assets as indirect way of raising money.

We have also significantly strengthened our asset and liability balance in the bank. We have created a new division within the bank. We need more information to be more proactive on this. But in the last six months we have come up with some idea where our gaps are and how we should fill those gaps and how we should position our balance sheet to get the maximum from the asset and liability structure that we have, without taking on significant additional risks. That is something that we have introduced this year as part of the restructuring process.

Going back to resource options we also have our share portfolio and although it is not the best time to divest equity there is that option too.

Last year we divested Ceylon Glass and Lanka Olex Cables. Both were divested to strategic investors and brought us a significant amount of profit and cash. There are similar investments that we could divest if we can find a strategic partner, making profits and cash both. And there are a few candidates, which we feel we may be able to work with this year too.

Also the lines of credit from the foreign funding sources like the ADB will remain, but not at the concessionary rates we got earlier. Credit lines will still be open, but interest rates could be closer to market rates. And I don't think the government will continue to guarantee the loans and bear the exchange rate risk etc for ever. So we may have to stand on our own feet and negotiate.

I think the DFCC has a good name in the international markets and I don't think the ability to raise the funds is an issue. I think the cost will be the issue.

New approvals and disbursements have recorded a decline of 27% and 25% respectively. Why?

If you look at 1998 gross customer advances and leases was 15.3 Billion. This went up to 17.8 billion 1999. In 2000 it was 18.9 billion.

In 1999 there was a fairly high jump. So we were working from a fairly high base.

Two things happened; because there were a lot of internal reorganization within the bank we did not want to go for a strong credit growth on top of that. So the concentration was on the internal restructuring. Secondly, new credit demand was relatively low. We also recognised the need to pay more attention to the difficult credits.

We strengthened our special administration unit, which basically looks after non-performing assets and debt recovery. It's not just a question of our enforcing security. We work together with the companies to see how we can actually keep the companies going. 

DFCC's intention is not to close businesses down. We are there to try and make sure that businesses work. And the realisation of security is actually a last resort.

On a Pricewater House recommendation this unit was operational even before I joined but I realized that DFCC has a high non-performing loan ratio and needed special attention for this unit.

In that environment DFCC did not go in for strong credit expansion.

So it is actually our credit growth rate that has declined not credit growth itself. In the last two quarters of the last financial year the demand for credit from the private sector was low, especially when it came to start up capital. There may have been demand for working capital but no so much for project funding.

A conscious decision we took was that we did not want to expose ourselves too much to working capital because our forte is project financing.

There are some dangers in getting involved with working capital because we don't see the day to day operation of a company unlike a commercial bank where they have current accounts.


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