The Sunday TimesBusiness

28th July 1996

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Secrecy law and banks

An astounding proposal has been put forward by the Minister of Justice and Deputy Minister of Finance Prof. G.L. Peiris to relax the secrecy provisions applicable to the two state banks. To effect this, Parliament would have to amend the Bank of Ceylon Ordinance in respect of its secrecy provisions and also the Banking Act in its application to the maintenance of secrecy by the People's Bank as the People's Bank Act does not contain secrecy provisions.

What is the reason for this extraordinary measure which will intrude on the time honoured secrecy oligations of banks? The Minister has said the public has the right to know who the large defaulters are. But. why? Does transparency require that the borrowers of these two banks should be known because they have been lent government funds? But the Government's contribution to the share capital of the banks is an insignificant proportion of the total resources while depositors' funds form the major component. If, however, depositors should know who have taken their monies and not put them back, depositors in every commercial bank in this country should be told who are making use of their monies wastefully. This is surely nonsense.

Would publicising the names of defaulters induce them to repay their loans as the Minister pre-supposes? But, at the same time he has also said the banks find it difficult to recover the loans as there was no collateral or insufficient collateral where these debts were concerned. So how can exposure to the public gaze induce the borrowers to pay back when apparently they cannot and the banks appear to be helpless in this regard?

Prof. Peiris says the secrecy provisions will be relaxed only in a carefully selected category of cases. But who will select and, more important, what will be the basis of selections? It could happen that in making the selection there would be much temptation to include borrowers who are opposed to the government of the day. And once the exposure process is under way it could also happen that the relaxation. would be made applicable not merely to borrowers but to lenders (depositors), as well on the ground that the public has the right to know who the people are who have illicitly amassed vast amounts of wealth.

Would the relaxation of the secrecy obligations be confined to the state banks? If only the state banks are subjected to disclosure, people will in time move to other banks for their credit requirements and in order to expose to the public view large defaulters of loans granted by private banks - the people have a right to know - the general secrecy provisions of the Banking Act applicable to all banks would also have to be amended. Relaxation of bank secrecy provisions would become open ended, not merely discretionary.

The reason for this sorry state of affairs is that the two state banks have extended credit without due care and prudence. The Presidential Commission on Finance and Banking observed that "lending operations of the two banks to companies and individuals were sometimes not based on strictly commercial considerations. Also the banks were directed to grant facilities to state corporations, sometimes supported by written or oral guarantees. However, such guarantees were seldom honoured promptly and in the manner desired by the banks."

Importantly, of course the two banks need to make every effort to recover the loans in default using to the fullest extent the measures available to them under the recently enacted debt recovery laws. But it also important that to avoid the sort of situation where, as the Minister says, loans amounting to seven billion rupees are in default, credit management in the two banks should be revamped as also accounting standards.

A pre-requisite for a successful conclusion to such a revamping process is that there should be no government interference in the extension of credit. The Finance and Banking Commission has observed that political pressures leading to the relaxation of commercial criteria in assessing projects and the postponement of timely recovery action were the main external factors which have led to the two banks having very high levels of non-performing loans. Three years ago the Bank of Ceylon and the People's Bank signed agreements with the Finance Ministry Secretary. This was part of the restructuring of the two banks to enable them to have a commercial focus without resorting to their privatisation. The government agreed not to intervene in the daily operations of the two banks , but that if the government required the banks to grant any loans which would not normally be granted on commercial criteria, the government will provide a time-bound guarantee for the amount of the provisioning required.

What is the real reason for this extraordinary proposal? Has it been advanced in the interests of the banks concerned? Has the Central Bank been consulted? If, indeed, the authorities think, as they say they do that publicity will induce defaulters to pay up and act as a deterrent for the future, the obvious thing for the banks to do is for them to institute legal proceedings against the offenders. This is what the banks, should do anyway. But the government is of the view, according to the Minister, that the national interest demands that "in a carefully selected category of cases parliamentary scrutiny should be permitted."

The proposal to expose to the public view a "carefully selected category" of large defaulters smacks of political overtones. It is not uncommon for our governments to interfere in banking operations for political ends. It has happened that before elections governments have prevailed upon the state banks to indulge in acts of debt forgiveness. They have been instructed to write off debts of farmers and such like even if they were wilful defaulters.

It is hoped that sober second thoughts will prevail on the proposal to tamper with the secrecy obligations of banks which have been instituted by law because if the proposal is implemented it would seriously undermine the banking system of our country which the recently enacted banking legislation seeks to put on a sound footing to strengthen our financial and banking sectors.

The banks must themselves set in motion the processes for recovery of their funds. If officers have not lent funds according to laid down criteria they should be punished. If Boards of Directors have acted irresponsibly, their conduct should be questioned and they should be made accountable. None of these requires the secrecy provisions to be violated.


Best annual report award for HNB

Hatton National Bank was adjudged the winner in the competition for Best Annual Report and Accounts for 1995 in the Banking and Financial Institution category. The competition was organised by the Institute of Chartered Accountants of Sri Lanka.

Picture shows M. Machado, Senior Deputy General Manager (Corporate Banking) of the HNB receiving the award from the Industries Development Minister C.V. Goonaratne.

HNB was also the runners-up in the Overall competition for the Best Corporate Report and Accounts 1995.


Govt. Reviews deal with P&O

By Arshad M. Hadjirin

The government is reviewing a controversial letter of intent issued to P&O for containerizing the Queen Elizabeth Quay (QEQ) in the Port of Colombo. Port & Shipping Secretary M.N. Junaid told 'The Sunday Times'. He was not sure when the project would be implemented.

Last week speculation was rife among shipping circles that the government would sign an agreement with P&O, giving it full control over a portion of the harbour. Some port professionals had warned this move would have severe repercussions and hinder development of the port. In this connection a consortium known as South Asia Gateway Terminals (Pvt) Limited (SAGT) was to be formed to undertake development of the QEQ and the outer harbour areas of the Colombo Port.

The shareholders of the consortium were to be P&O Containers Limited (UK), P&O Australia Limited, P&O's local partner John Keells Holdings Limited and the SLPA. They were to take over QEQ and the adjacent area on a build operate and transfer (BOT) basis on a 50 year lease.

Government professionals told 'The Sunday Times' that the proposed agreement with P&O would be opposed by nearly 75 per cent of the 15,000 harbour workers. They said about 2,000 workers might lose their jobs if the P&O plans were implemented.

The world renowned P&O containers along with its local partner, who became the sole bidder, for a government tender which called for a massive project to construct a breakwater, south west of QEQ likely to cost US $450 million, ended up proposing a low key project, which the government approved.

The professionals claimed that the original tender was for development of the area outside QEQ, but there had been a clear deviation of tender procedures through a minor clause in the tender notice, enabling P&O to come forward with a project costing only US $206 million.

This tender was floated in the middle of last year, soon after SLPA went into an agreement with Japan to implement the Master Plan at a cost US $86 million, based on a soft loan scheme by the Overseas Economic Corporation Fund (OECF).

It is learnt that the Japanese are deeply concerned over the government's move to shun their project, which would mean no more aid from Japan towards the enhancement of the port.


Mind Your Business

By Business Bug

High-tech speed?

A company moving fast in the advertising field, appears to be caught up by its own graphically excessive speed. This company's creditors now worry whether they would be left high and dry with the company becoming a speck on the horizon in the future.

Preparing the cake

Satellite was talking tough explaining how she could not win wars and give salary increases, both at the same time. Madam also said that subsidies were a heavy strain on the purse strings.

That is indeed so and with the Defence bill expected to top 50 billion this year, the wheat flour subsidy will be the first to go, we hear....

Well, if you don't have bread....

Hold on buy orders

Colombo's stocks are nose-diving and the Dehiwela explosion won't help, brokers say.

Buy orders for big parcels of blue chips have been stayed following Wednesday's incident, they say.

The reason? Overseas buyers expect the market to placement further and rest after breaking the 500-barrier in the All-Share Index.

That does explain the negligible amounts of foreign buys this week....

Unhappy over probe

More about the market:

When a company had just announced a share issue, there follows an announcement that affairs of the company would be probed by a Commission.

"Perfect timing," says grumbling company officials, but it is not likely that the issue would be postponed....


JF's launch in Lanka revives confidence

The international investment house Jardine Flemings (JF) formally launched its corporate finance activities in Sri Lanka last Thursday.

"Despite the uncertain environment it is encouraging that a large investment house has shown confidence in the country", says Anura Wickremasinghe, head of JF's stockbroking operation in Sri Lanka. "It is up to us to make full use of this opportunity", he adds.

Jardine Flemings first entered Sri Lanka by forming a tri-venture stockbroking company HDF Securities.

Recently JF bought out one of the joint venture partners, DFCC and renamed the stockbroking company, Jardine Fleming HNB (Pvt) Ltd.

At present all corporate finance activities are conducted via JF's Hong Kong offices.

"JF would be introducing innovative capital market products to Sri Lanka", Mr. Wikremasinghe said. In addition JF is also expected to bid for privatization contracts of the government.

JF currently maintains a presence in 41 countries, of which 16 are in Asia. Recently it had opened two offices in Vietnam.

Flemings' Head of Global Capital Markets James Bruce and Regional Head of Capital Markets Rupert McCowan were in Sri Lanka last week. JF had been involved in the privatization of the British electrical industry, and had recently raised US $125 mn in the privatization of Bombay Suburban Electricity. In addition they have also been awarded the contract for a capital raising exercise for the India telecom firm, VSNL.

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