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Central
Bank cuts interest rates The bank said
the change is also intended to further strengthen the recovery in
economic activity. The last change in these rates was on November
22 last year when the Repo rate was reduced by 75 basis points and
the Reverse Repo rate by 100 basis points. The premier
banking regulator said in a statement that recent economic developments
have warranted a review of the main policy rates of the Central
Bank. The excess liquidity in the market has led to a continuous
decline in yields on government paper while the yield on 91-day
Treasury bills eased by 98 basis points and the yield on 364-day
bills by 156 basis points since the last reduction in Central Bank
rates. The call money market has been highly liquid and the surplus
in the market was around Rs. 12 billion at end 2002. Inflation has
decreased steadily in 2002. Measured by the 12-month moving average
of the Colombo District Consumer Price Index (CDCPI), inflation,
fell to 6.8 percent in December 2002 from 10.3 percent in December
2001 while on a point to point basis, it declined to 4.5 percent
from 9.7 percent in the same period. The CDCPI showed a decline
in inflation from November to December too, although the Colombo
Consumers Price Index (CCPI) showed an increase. Inflation is expected
to decline further in 2003. It said the
government's domestic borrowing has been contained, thus reducing
pressure on domestic interest rates. Improved Treasury cash management
has reduced the governments overdraft with the two state banks from
around Rs. 38 billion at the end of 2001 to a comfortable level
of around Rs. 4 billion at end 2002. The developments in the external
sector too have been encouraging. The balance of payments recorded
a surplus of $ 122 million in the first three quarters of 2002.
The country's external reserve position has improved, with gross
official reserves (excluding ACU liabilities) rising from $ 1,200
million (equivalent to 2.5 months of imports) at end December, 2001,
to around $ 1,510 million (equivalent to about 3.1 months of imports).
The foreign exchange market has been stable. The increasing activity
in the forward market and declining forward premia reflect both
improved perceptions regarding the stability of the market and an
expectation of a further decline in domestic market interest rates.
The rupee has depreciated against the US dollar by about 3.7 percent
in 2002, and by about 13-19 percent against other major currencies
such as the euro, pound sterling and yen, due to sharp cross currency
movements. Annual monetary growth has been declining from a peak
of 17.9 percent in June and is expected to be around 14-15 percent
at end 2002. The growth of reserve money has remained well within
the target. The latest interest rate cuts would be closely monitored by the Central Bank. The Bank will also continue to monitor economic developments closely and make changes to its rates whenever appropriate, it said. Review
lending policies in banks Banks operate
on depositor's money and depositors should not be made to feel that
their monies invested are at risk. A high rate of NPLs will make
the public and depositors lose confidence in the bank. Taking security
or collateral from the borrower is a process by which most lending
institutions safeguard the facilities made available to their clients.
This practice has been there for a long time, even before lending
and borrowing were institutionalised. All loans are not secured
by collateral, with a large number of loans given on the personal
credibility of the borrowers or by way of project loans. Security or
collateral takes the form of a mortgage over the property owned
by the borrower. Land and property is considered to be the best
security. Credit always respects property. A basic document
in a mortgage transaction is a Valuation Report of the property
offered by the borrower to the lender. A valuation report is required
for the reason that properties are heterogeneous. It is generally
accepted that land values increase regularly but this may not be
everywhere and every time. In the past three years or so property
values have been stagnant except in a few isolated localities. It
may be that there is a general level of values locality-wise but
valuations of individual properties will have to be done on an individual
basis taking the property as an entity. The valuer
has to educate himself about the property in detail. Valuers are
liable to professional negligence in the same way as in other professions.
The first job of a Credit Officer is to find a suitable valuer for
that particular kind of property. In a profession like valuation
where anyone without regard to his academic qualifications or professional
competence can stand as a valuer to the public, the credit officer
will find it difficult to select a valuer for an assignment. Charlatans
in the profession are many. Certain employers
give preference to speed over anything else. It is unfortunate to
note that there are certain banks who have "express valuers"
in their panels of valuers thus debasing the profession. A valuer
cannot do a valuation overnight. The valuation should be in his
mind before he expresses an opinion. This takes time. A quick valuation
is not the sole criterion of a good valuation. Things done in haste
end up in disaster. The valuer should be given a reasonable time
to do the valuation. In Sri Lanka
there are only two Institutes catering to the profession. One is
the Royal Institution of Chartered Surveyors (Valuation Division),
United Kingdom with a branch operating in Sri Lanka. There are two
grades of membership namely Fellow (FRICS) member (MIRCS). Admission
is through Degree Courses from the Universities of London or Reading
or other accredited courses. These courses provide the academic
background to be a valuer. Land Economics,
Land Laws, Building Construction, Surveying, Town Planning are the
core subjects. It is after years of apprenticeship and training
that membership are awarded. Members are entitled to call themselves'
Chartered Valuers. This Institute established by Royal Charter is
more than 100 years old and has worldwide recognition. The other institute
is the Institute of Valuers of Sri Lanka incorporated by Act of
Parliament. There are four grades of Membership in this Institute
namely, Fellow, Graduate, Associate and Licenciate, a grade created
to accommodate the old hands who were practicing Valuers for Courts,
etc, at the time of the inception of the Institute. This is a dying
grade. The other grades
are with varying levels of academic learning and experience. To
attain Fellow Membership status one requires more than 15 years
experience at supervisory levels. In addition to these two Institutions
there are a number of Associations of Valuers with various designatory
memberships all over the world. In many of these associations, it
is a matter of paying high membership fees. As in other
professions, valuation too has branches of practice, e.g. Commercial,
Residential, Rating, Asset, Plant and Machinery, etc. When an assignment
is given to a valuer, the employer should see to it that the valuer
is capable of handling that type of property. In the Royal Institute
there are faculties for each of these sub-divisions and they keep
members updated by means of Continuing Professional Development
Programmes and updated technical statements of practice. Valuation of
a property differs from purpose to purpose. A valuation for market
price, for compulsory acquisition, for mortgage, for foreclosure
of a mortgage, assets of a company all differ from one another although
the property may be the same. Mortgage Valuations
stand out of other valuations in that it should be a conservative
one. It should not include movables or things that could be easily
removed by the mortgagor. Some banks, lend on chattels, and machinery
loans are mostly given by development banks. Plant and Machinery
especially electronic equipment depreciate fast and have little
or no second hand value. In many large scale undertakings, plant
and machinery are of a very specialised nature and designed for
one process. They can be sold only in its entirety and not in parts.
Buyers are few and scarce. Lenders should pay attention to these
facts when they lend on plant and machinery. In a normal
valuation of an urban, built-up property, it is usual to employ
two methods of valuation. Namely the Cost Approach and the Income
Approach. Cost approach is sometimes called the Land and Building
method where the land and the building are valued separately using
comparative data and added together. In the income
approach valuation method, the net stable income derivable from
the property is capitalised at the rate the investors expect from
that type of investment. As we all know rates of return from properties
are much below even the gilt-edged securities. The reason for this
is the capital appreciation expected of in property investments.
Management,
liquidity, security all play a part in the rate of return expected
from property investments. There are two
interests in property that could be mortgaged. They are the freehold
interest and the leasehold interest. Freehold is the highest form
of ownership that one can have in property. Freehold ownership is
forever and when a freeholder assigns a definite period to another
person, a leasehold is created. When a leasehold is given out by
a freeholder, the freeholder creates two interest in his property
- namely the Freehold Interest and the Leasehold Interest. The Freeholder's
interest comprise of the right to receive the stipulated rent reserved
in the lease and the reversion of the property to him at the expiry
of the lease. The lessee's interest is the right to enjoy the property
throughout the lease period paying the stipulated rent to the lessor
and adhering to the covenants and other conditions set out in the
lease indenture. These two interests subsist simultaneously throughout
the duration of the lease. A sale of the leasehold interest can
take place only by way of a sub-lease for a period less than the
un-expired period of the lease. The purchaser will be subject to
the original conditions of the lease. The valuation
of a leasehold is somewhat problematic. The terms, conditions and
covenants in the lease agreement, premiums paid are vital to the
valuation. Some valuers overcome all these difficulties by saying
that leases of 99 years are more or less freehold. This is absolutely
wrong. Where there is a lease in which the period is over about 60 years and that the stipulated lease rent is equivalent to market rent and with no other financial involvement such as premiums, when capitalised results in a figure approximately equivalent to the freehold value. But leases are not that simple. Heavy premiums are charged at the commencement of the lease with restrictions on the use of the land by lessee. Commercial
mediation to expand to provinces "What
we are trying to do is to go out to areas that have a business concentration,"
said K.K. de Silva, co-ordinator of the Commercial Mediation Centre
which operates under the Ceylon Chamber of Commerce. This will extend
the facility of solving business disputes in these areas outside
the traditional court system. At the moment
de Silva said that there was no hurry to expand to the northern
province as the centre's aim is to concentrate on areas that have
been having normal business activities throughout the years. They hope to
extend their services to Kandy, Kurunegala and Galle where they
expect people to be interested in mediation and seek their help. "Jaffna
of course has not had any business concentration till recently.
It is too premature now.....but the moment we feel there is a response
we will be there," added De Silva. "We have
been trying to promote the concept of mediation and there is a certain
degree of awareness at the moment but people are still not flocking
to the centre. There is a degree of resistance so any expansion
will depend on demand," he said. Any business
dispute can be referred to mediation regardless of the value of
the dispute. One of the significant features of mediation is that
both parties must agree to resolve the commercial dispute through
the process of mediation and come to a solution that is mutually
satisfying. A person who
wants to make an application for mediation would have to pay an
initial application fee of Rs. 1,000 to the centre. After the receipt
of the application the centre contacts the other party and if he
wishes to proceed, then the actual process begins. The two parties
will then have to make another payment called a mediation fee, which
is a minimum of Rs. 5,000. This payment is calculated on the basis
of one rupee for every Rs.1,000 of the value of the business dispute.
The maximum mediation fee is Rs. 50,000. These costs would be shared
by both parties. After the commencement
of the mediation sessions, there is a mediator's fee of Rs. 1,000,
an administrative fee of Rs. 500 and the mediator's traveling costs
of around Rs. 500. The total cost for a session would amount to
Rs. 2,000. Usually commercial
disputes are resolved in five or six sessions, which will amount
to about Rs. 16,000 whereas if the parties decide to go to courts
the preliminary expenses alone, such as consultation, may be above
Rs. 10,000, De Silva said. "This
is something that is very useful to the business community,"
he said. But what generally
happens is that when a dispute arises in a company it is generally
referred to a lawyer who takes over the responsibility for the case. Most companies
prefer to do this than enter into mediation which would involve
the parties having to take the responsibility themselves. "So
the efficiency of the representative handling the dispute for the
company during mediation comes into question". The panel of
mediators is equipped to handle all business disputes with representatives
from the Federation of Chambers of Commerce and Industry in Sri
Lanka, the Ceylon Chamber of Commerce, the Ceylon National Chamber
of Industries and the Ministry of Justice. The setting
up of the Commercial Mediation Centre and the promotion of mediation
as a form of Alternative Dispute Resolution (ADR) is a direct response
to a long felt need of the business community for a cost effective,
speedy and amicable resolution of commercial disputes. The system facilitates the continuance of good commercial relationships and allows room for parties to commence legal proceedings if they do not reach an agreement. Fresh
ideas to rejuvenate rural economy The project
is estimated to provide nearly 100,000 persons with direct employment
and establish a special design centre to meet the needs of both
the local and foreign markets. It will also have a special firm
that will provide raw materials such as rubber and leather at competitive
prices. In order to
export these products, all domestic footwear factories would be
equipped with modern technology from countries like India, Italy
and Germany, Minister of Rural Economy Bandula Gunawardana said
in a recent interview. Speaking on
the latest projects undertaken by his ministry, the minister said
that a trust fund under the name of 'Rural Resuscitation Trust '
had been established to help develop social and economic infrastructure,
entrepreneurship and other assistance programmes for self-employed
or small and medium scale enterprises. He said the
ministry was also establishing economic centres to bring all scattered
salesmen together into a single market. "Salesmen are not organised
in Sri Lanka. We have launched two new economic centres in Meegoda
and Embilipitiya to reduce the burden on the Colombo economic centre." The Meegoda
Centre is the first economic centre to be set up in Sri Lanka for
the three commercial sectors of export, wholesale exchange and retail
trade. This will also be the first economic centre in Sri Lanka
to market all food items at one place. The Meegoda
economic centre cost Rs. 70 million while the Embilipitiya centre,
based on promoting banana cultivation, cost Rs. 55 million. Gunawardena
said more than half of the investment cost of these economic centres
is expected to be met by the private sector, and a special trust
will be established with the collaboration of both the state and
private sectors for operation, administration and development of
these centres. The ministry
together with the Export Development Board has also set up three
export processing villages at a cost of Rs. 44.5 million in Godakawela,
Rajanganaya and Angunakolapelessa, with the aim of producing export
items such as fruits and vegetables, mushrooms and other coir-based
products using rural resources. The unique feature of this concept
is that 28 percent of the companies that are to be set up will be
owned by the farmers or producers in the project. Among the other
rural economic development programmes initiated by the ministry,
the 'Thuru Sevana" sales promotion centre programme is a concept
built to generate self-employment and rural income generating opportunities
in an eco-friendly environment. The project will be set up in key
rural areas, by the roadside, marketing rural products such as ornamental
plants, fruits and vegetables and fertiliser. Handicrafts
are also to be given a boost in the new year, once the first handicraft
park in the country is constructed in the historical cities of Sigiriya
and Dambulla, providing a better market for traditional craftsmen
to sell their products to both local and foreign tourists without
the aid of middlemen. This new park will also create an opportunity for craftsmen to interact with the buyers in order to identify the current market trends and develop their own technical skills to suit the rapidly changing market, he said. - (SG)
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