CB dismisses Janashakthi bid
By a staff writer
Central Bank Governor A.S. Jayawardena last week dismissed the offer by Janashakthi Insurance Company to revive the failed Pramuka Bank saying that the company had not indicated how much money they were willing to spend on the effort.

"We don't think it is a serious offer," Jayawardena said in an interview when asked about the Central Bank's position on the Janashakthi offer.

"We asked them how much they are willing to put in (to revive Pramuka), they have not answered. I am making that statement with utmost responsibility."

Jayawardena said Janashakthi had only asked for detailed audit information about Pramuka, including details about its loans and borrowers and the security that had been pledged.

The Central Bank was unable to provide the information Janashakthi had asked for owing to banking secrecy laws, he said.

Pramuka's financial deficiencies were so great that about Rs. 3-4,000 million would be required to revive it, he said.

"When we asked them whether they had the money, they said 'no'," he said. "In any case anybody who wants to start a new bank can do so with Rs. 500 million. Why should they pay Rs. 3-4,000 million?"

Pramuka was insolvent with about three-quarters of its loans not being recoverable and the irregularities the bank management had been engaged in had been very difficult to detect, Jayawardena said.

Asked why the Central Bank decided to wind up Pramuka but allowed others to bail out Union Bank and Merc Bank, Jayawardena said: "There is no discrimination. When it comes to banks, there are good banks and there are bad banks. There are good banks which have a good relationship with the Central Bank and don't engage in fraud and if they get into difficulty we help them. We ask them to bring in more capital. If they can't we help them form a partnership with another bank."

But banks which did not listen to Central Bank advice and flouted Central Bank instructions "openly and brazenly" could not be revived, he said.

"Its (Pramuka's) track record was so bad that when we talked to some of the other banks to see whether they would be interested in coming to its rescue they asked us whether we were joking."

Jayawardene's views will disappoint many desperate depositors who have been leading a campaign to revive the bank and recover their deposits. Some cases have been filed in courts challenging the Central Bank decision to liquidate the bank which has created an unavoidable situation for depositors. As a result of the case, the Central Bank has been forced to continue paying salaries of Pramuka employees -- all of which come from the deposits. Janashakthi's offer to take over the bank came at the request of the depositors.

Vanik hopes for recovery in seven years
Vanik Inc, the beleaguered Colombo merchant bank trying to convince depositors to accept delayed payments, is hoping to recover under a five to seven-year restructuring plan.

While the cash-strapped merchant bank is struggling, Vanik's other subsidiaries have been showing good returns and efforts are underway to clear the huge Rs. 7 billion debt. The group is also investing in a teak plantation at Anamaduwa to raise revenue but it could trigger fresh concerns from anxious depositors if the project fails.

Justin Meegoda, president and CEO of Vanik Inc, said under VINKETH launched about six months ago, 100 acres have been purchased to plant teak. In a new concept, the company has so far planted trees on 50 acres and hopes to sell 40-perch blocks at Rs. 139,000 per block and manage the property on behalf of the new owner. The company says the management fee is built into the property cost so there is no added cost with expectations that the 130 trees to be planted in each block would end up with 40 trees ready for felling in 18 years time. VINTECH will launch its advertising campaign next month, Meegoda said.

The company CEO, against whom various accusations have been levelled by depositors and disgruntled groups, believes his company can get out of the woods under the restructuring plan. "We are individually negotiating with banks to reschedule our debts over a five to seven-year period while in the case of depositors, we hope to complete repayments in three years," he said.

The total liabilities ran up to Rs. 7 billion which Meegoda attributes to "some mistakes we made in investments" but the figure has been reduced to Rs. 3 billion with some cost cutting exercises enforced in the company. Now the company is trying to convince depositors to accept a delayed-payment plan.

Banks must cut lending rates
There is considerable scope for commercial banks to bring down their lending rates, Central Bank Governor A.S. Jayawardena said last week.

"And I think they should be doing so. They have been reducing their interest rates but not enough," he told The Sunday Times FT. "They first bring down rates to their prime customers and then gradually extend to other customers."

The spread between the cost at which commercial banks raise their funds and the rates at which they lend are "very, very large", being as high as 5-6 percentage points compared with just 1-2 percentage points elsewhere in Asia, Jayawardena said.

"This is the reason why there has been heavy criticism of banks. That their lending rates are very high compared to their borrowing costs."

The decline in lending rates of commercial banks do not seem to be proportionate with the decline in their deposit rates, Jayawardena said.

"Of course, they can argue that they have a high proportion of non-performing loans for which they have to make provisions - set aside some of their profits to meet that liability."

In Sri Lanka NPLs are in the region of 15-16 percent compared with 5-10 percent that is considered satisfactory elsewhere.

Jayawardena said it was not unexpected that NPLs had increased considering the recession in 2001 when even some exporters defaulted on loans. "So it is also possible banks are trying to make provision for bad loans for a certain period when our economy did badly. That may be one argument they might use but I yet think there is some scope for a reduction in lending rates."

Some banks had already reduced their lending rates while others were yet to do so.

"If a bank does not reduce its lending rate one would expect it to lose customers. But they seem to be going on without much impact on their lending operations. Some borrowers seem willing to pay 2-3 percentage points interest more from their regular bank than go to another bank," he said.

The Central Bank went to the extent of publishing each bank's deposit and lending rates and plans to do so again to show the difference between the borrowing and lending rates so that customers can see for themselves how much each bank will charge for different types of loans.

Govt defers imposing VAT on retail trade
By Thushara Matthias
The government has postponed plans to bring the retail trade under the Value Added Tax (VAT) system which was to have been implemented in July this year, Finance Ministry officials said.

There were concerns that the imposition of VAT on retail trade on top of the existing turnover tax charged by provincial councils would double the tax burden, they said adding that no new dates have been set for implementing this budget proposal. "Therefore there should be some kind of revenue sharing that needs to be introduced before VAT could be imposed on retail trade. Furthermore, the turnover tax cannot be abolished without amending the constitution," an official said.

Concerns over the rising cost of living and the need for further studies before bringing the retail trade into the VAT system also contributed to the postponement.

The gross collection of VAT alone in 2002 for the four-month period September to December was Rs. 33.7 billion consisting of Rs. 14.5 billion from domestic collections and Rs. 19.2 billion from imports. The government raised Rs. 30.9 billion from the Goods and Services Tax (GST) and the National Security Levy (NSL) in the same period in 2001.

When VAT was introduced it was to be revenue neutral and the government was confident that the original forecast tax revenue could be achieved and any revenue shortfall would be manageable.

GST, NSL and VAT together raised Rs. 95.8 billion in 2002, slightly less than the forecast Rs. 98 billion.

Finance Ministry officials said they believed the collection should have been much higher due to inflation, economic growth and the higher band of VAT at 20 percent on certain goods.

The shortfall may have been owing to some items which were liable to NSL, such as wheat, rice and books, being exempted from VAT, others which came under both GST and NSL now coming only under the 10 percent VAT band and large amounts of refunds, particularly to textile manufacturers and the construction industry.

For instance, the VAT on cement is 20 percent but on construction is 10 percent. Refunds have to be made as the inputs are liable at 20 percent and outputs are liable at 10 percent.

Furthermore the government had to also accept a 2.5 percent tax reduction because several items, which were liable to the 12.5 percent GST, had now come under the 10 percent VAT band. These include cinematic films, leasing facilities, hotels, and consumption of over 30 kilo watt hours of electricity a month.

Customs has also stopped imposing a 25 percent price mark-up on imports as was done under the GST and NSL systems. That procedure was done away with as it was an artificial price that they charged tax on.

Officials said that even during the GST and NSL tax regime collections were far below the estimates.

The VAT lower band of 10 percent applies to essential goods and services while all other goods and services will be charged at the standard rate of 20 percent.

Sources said it was too early to say whether VAT had led to a shortfall in revenue collection since no evaluation had yet been done and no in-depth study made in relation to collections and the implications of the new systems.

The government plans to collect Rs. 119 billion in 2003 from VAT alone and expects that revenue will increase owing to fresh hope the country's economy will grow strongly this year.

Revenue in the first quarter (January to March) came to Rs. 27.6 billion (Rs. 14 billion from imports and Rs. 13.6 billion from local collections).

Sathosa privatisation runs into several snags
Six months after tenders closed for the part sale and management of the Sathosa supermarket chain, the Ministry of Commerce and Consumer Affairs is yet to select the successful bidder raising questions of lack of transparency in the process.

Although two - Cargills and a John Keells-led consortium - of the five bids were believed to have been accepted for the final selection while the other three were rejected by the cabinet-appointed consultants and the cabinet-appointed Tender Board, questions are being raised over unnecessary delays in awarding the tender.

Informed sources said there is an attempt to seek a fresh revaluation of the assets on the grounds that the original value of Rs. 400 million (for the 40 percent stake) recommended and accepted by the tender committees is not good enough.

Industry analysts say if this happens it would be unfair to all bidders given that the bids were called after the assets were valued.

When the tender was first announced last October, offers were made by the John Keells-Carsons-Ceylon Biscuits consortium, Cargills group, Abans, Shoprite Ltd and Foodlands Lanka.

The consultants, which had made the original valuation of the assets, then examined the bids and recommended two of the offers.

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