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The Sunday TimesBusiness

16th March1997




Suspended lease clamp say financiers

By Asantha Sirimanne

With the date of implementation drawing nearer, opposition to the recent budget proposal to restrict capital allowances from lease income is gaining momentum with the country's top financiers calling for its suspension and warning of adverse consequences to local industries, particularly the small and medium sector. "The government proposal if implemented will undoubtedly increase the cost of a lease to the user," National Development Bank General Manager Ranjith Fernando said.The Deputy Finance Minister G. L. Pieris introduced the proposal last November, claiming that it will help the leasing industry and gain additional revenue for the government by increasing the taxable income of financial institutions."The availability of these allowances, hitherto, for set off against income from other activities, enabled both commercial and development banks to offer very competitive rates of interest on small leases," Mr. Fernando told shareholders.The banks in particular had promoted this product and offered it islandwide through their extensive network of branches, benefiting the small and medium industrialists throughout the country. "It is a very unfair regulation," says Hatton National Bank Chief Executive Rienzie Wijetilleke. "We have already made strong representation to the authorities. "HNB would however continue to give lease facilities as it was the only form of financing available to small businesses without sophisticated accounting systems. "This will affect grassroots industries which do not have collateral to obtain loans," says DFCC Leasing Manager Janaka Perera. Many financial analysts feel that the government had been ill advised to introduce this proposal to help the three specialised leasing companies, Lanka Orix Leasing Company, Mercantile Leasing and Commercial Leasing. The companies with a handful of branches were mostly confined to Colombo while commercial banks with extensive branch networks have lost the incentive to go into leasing. Questions are being asked how the proposal can help the leasing industry when the majority of the lease business ( an estimated 60 per cent or more) is in the hands of non-specialised institutions. "Leasing had been made popular not by specialised leasing companies but by others," says Vanik President Justin Meegoda. "This will definitely hamper the development of the leasing industry in Sri Lanka. "Mr. Meegoda said that non-specialised institutions had made representations to the government but without any effect. "Since access to capital goods, especially for the small and medium industries is facilitated by leasing, an increase in costs would be detrimental to the economy as a whole and this proposal is viewed with some concern," the Merchant Bank of Sri Lanka said in its annual report. In 95/96 the 16 companies in the Leasing Association had given new leases to the value of Rs 8.9 bn up from Rs 7.2 bn the year before. "Going into the basic accounting principles, depreciation of machinery in a manufacturing company is allowed to be set off against other income, such as from trading," points out Vanik's head of Leasing Travis Waas. He says it is not correct to make a distinction in the case of leasing only, simply to promote specialised leasing companies. Top officials of the Leasing Association were not available for comment. One argument in favour of the proposal is that it will help create a level playing field between specialists and non-specialists. At present specialists do not have other business income to set-off depreciation against. But critics say there are no regulations to prevent them from diversifying either. Historically specialists have also introduced new products, and it is argued that promoting specialists who have a commitment to the industry would ultimately help the industry itself. But many also question why, in the face of extremely high interest rates in the country, the government is contributing to raise interest rates simply to give a competitive edge to three specialists at the expense of the customer. Mr. Ranjith Fernando has said that specialised leasing companies were merely financial intermediaries in the process of extending financial products to the business community. "It would be illogical and unwise to subordinate the interest of the beneficiary to that of the intermediary," he pointed out. "We therefore sincerely hope that the new proposal will be suspended by the Minister, in the interest of the business community, specially the small and medium scale businessmen in the outstations," he added. The other benefit outlined in the budget proposal was that the proposal would help boost government revenue by slashing the tax shield available from leasing. However tax experts say the benefit would be temporary. "These institutions can incorporate specialised subsidiaries, fund the vehicle at concessionay rates and get the benefit of the tax shield once the portfolio starts building up," says one tax specialist.


By Business Bug

SOS from milk food

In an open economy, it is more the merrier for the consumer but it may not be so for the producer. And a local milk food producer has learnt this lesson the hard way - their turnover and profits were well below expectations for last year. Now, the company has decided to ask for concessions from the state, to try and improve their performance in Ninety Seven...

Tourism in Sinhala

The tourist industry is down in the dumps and city five stars are exploring ways and means of boosting business. One has come up with a novel idea - advertising in the Sinhalese media. And, other hotels will soon follow this trend we hear.

FRN : need for limits

The government has offered a three year Floating Rate Note (FRN) for US 50 Million Dollars in the international market. There is little doubt that this would be taken up. The critical issue is at what price. The rate of interest is vitally significant as it would give an indication of the country's credit rating and set the standard for future commercial borrowing. This is especially so as this FRN is after a lapse of 15 years and several Sri Lankan institutions are poised to borrow at commercial rates. The government has ventured into the international capital market at a propitious time. There is considerable interest among investors in Asian bonds. Mutual funds have large resources of capital to be invested in emerging bond markets and Sri Lanka could capitalise on this. The offering is relatively small and there is likely to be a keen interest in it. Pakistan and Vietnam are also likely to issue bonds to take advantage of the prevailing market conditions. The interest rate for these bonds would be determined on the basis of LIBOR plus a margin. The country actually deserves to get it at LIBOR plus 100 basic points. This may not be so. A rate of LIBOR plus around 2 per cent or 200 basic points is more likely. This is entirely due to the exaggerated security situation which increases the country risk rating. Otherwise the country has an excellent track record of never defaulting on any loans. Also the foreign exchange resources are reasonable and the foreign debt servicing ratio is only about 13 per cent of exports. The economic negatives are, the weak balance of payments, higher rate of inflation and the budget deficit. It is hoped that the demand for bonds will result in a competition for the Sri Lankan bonds and thereby attract a low rate of interest. The resort torsuch borrowing could ease the domestic credit market. Although the Govern(sr has stated that these bonds would be used for infrastructure projects, since funds are fungible, there is little point in focusing on the purpose. Irrespective of the purpose, this issue implies that the government would have a need to borrow about Rs 2500 million less on the local market. To this extent there would be an easing in the Treasury Bill market which should lead to lower interest rates. That is the good news for industrialists and businessmen. The internationally more significant factor is that this issue will indicate the rates at which commercial enterprises could borrow. If this FRN is at a low interest rate then other entities could expect to also borrow around this bench mark rate. One has to however sound a word of warning. Although the country's foreign debt is about one and a half times the annual export earnings, the debt service ratio is a modest and manageable 13 per cent of exports. This is principally due to a large proportion of borrowing being on very concessional terms from multi-lateral agencies like the World Bank, IMF and ADB and donor countries. If our commercial borrowing increases significantly then the situation will change and our debt servicing cost would rise. This would in turn weaken our already weak balance of payments through increased capital outflows. While the need and benefits of borrowing on commercial terms is recognised, it is essential to ensure that some prudent limits are laid down in the long run national interest. It must also be noted that though foreign borrowing is at lower interest rates than domestic interest rates, these borrowings have a higher burden of repayment than that denoted by the interest rate owing to the depreciation of the Rupee. Both the capital repayment and interest costs could be more burdensome in Rupee terms than the nominal interest rates.

Final bidders for Mortgage Bank

By Shamindra Kulamannage

The Commercial Bank and Vanik Incoporation Ltd. have been short-listed by PERC as the final bidders for the 40% equity stake of the State Mortgage and Investment Bank (SMIB) The Business Times learns.

Commercial Bank Chairman Mahendra Amarasuriya said the bank had made a firm bid for the acquisition of the 40% stake of SMIB and that they are of the view that theirs was the best bid.

Commenting on the union action against the privatization of the SMIB, Mr. Amarasuriya said, should Commercial Bank acquire the 40% equity of SMIB together with the Management Control, the employees of SMIB would get better terms of employment and better benefits.

Finance & Planning Deputy General Manager R. Samaranayake told The Business Times that if the SMIB is handed over to a private party it would definitely be to the Commercial Bank. The reason he attributed to the prevalent union action was that the Bankers Union was in principle, against the privatization of the government banks and this has prompted a protest resulting in the employees of SMIB joining in actively.

A senior official of the SMIB said privatization has reached a stalemate principally because of the trade union action, but admitted that, "according to information received, the Commercial Bank bid was supposed to be the one that would probably be accepted".

He added that trade union action was largely a result of SMIB employees being disillusioned about the actual takeover as there has been little or no dialogue between the employees and PERC or the potential shareholders.

According to the official, the privatization agreement was to have been finalized in October last year but had been delayed due to the union action. "Most employees at the SMIB are in the dark with regard to the privatization of the bank. PERC should take the initiative to arrange a dialogue between the employees and prospective shareholders as most employees would prefer to leave the organization should they be adequately compensated." He also added that a majority of the employees were against privatization, under the current circumstances.

Chairman, Mr. Amarasuriya commenting on the bank's performance last year said it was a "sector-leading performance". Commercial Bank's pre-tax profit of Rs. 580.4 million for 1996 was the highest among the private indigenous banks. Its post-tax profit of 433.4 million, an increase of 31.7% over last year was also the highest among these banks, he said.

The bank's deposits, advances and total assets grew by 27 per cent, 20 per cent and 25 per cent respectively in 1996.

Plans for 1997 include expansion of the bank's branch network from 41 to over 50. Most of these branches are expected to be connected to the sophisticated ICBS computer system by the end of the year, maintaining the Commercial Bank's position as the largest computer linked bank network in the country.

The bank also plans to introduce pawnbroking, long-term housing loans and new instruments to raise foreign currency for local lending to exporters.

The principal shareholders of the bank are Standard Chartered (UK) Holdings Ltd. 40%, Sri Lanka Insurance Corporation Ltd. 24.6%, Sri Lanka Insurance Corporation Ltd. - life fund 4.99% and HSBC Intl. Nominees Ltd. 2.3%.

Commenting on the take over bid for 40% of the shares, Mr. Amarasuriya said that they did not prefer any party holding a 40% stake in the bank. But added that another bank taking management control of the Commercial Bank would not be in the best interest of the country and the banking sector as Sri Lanka was still considered an under-banked nation.

Maradana coming out of jam

The daily traffic sharls at the Maradana Junction especially during the rush hours will be eased considerably with the completion of the Maradana Junction improvement program in June 1997. The project spearheaded by the Colombo Municipal Council and the Ministry of Transport is undertaken to deal with the ever increasing congestion in the Colombo Metropolis. The Rs. 270 million project principally funded by the World Bank (70%) and the Government is geared towards handling the extra traffic congestion that might occur as a result of the Baseline Road improvement program which is being funded by the Japanese government. The initial project proposal had met with some opposition from the Department of Railway over the amount of head room allocated for the trains that pass underneath and thus the project had to be assessed and re-submitted. The CMC has acquired the services of Messers W.S. Atkins as consultants from the UK while the contractors are Lemmin Kalnen Company of Finland.The project is nearing completion with only the Darley Raod stretch to be laid and the new traffic lights to be assembled and would be a boon to the rush hour motorists frequenting the area.

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