The Sunday TimesBusiness

Day, Month 1997



Enter the head-hunter in job market

By Shamindra Kulamannage

In the concrete jungles of Sri Lanka, bright young sparks with top qualifications high IQs, and polished personalities, slink around looking for better opportunities.

Sitting in plush interiors are leaders in their trade, searching for their prey the best young blood in the trade.

Into this scenario enters a Head Hunter whose target is to hunt for the best in the game.

Head hunting a relatively new concept in Sri Lanka, is the prime activity of Executive Search Ltd (ESL), a subsidiary of Maritime International Ltd. As the name implies the company specializes in search and selection of top level prospects for top-level companies.

Executive Search Managing Director Fayaz Saleem explaining the head-hunting concept said the company, identifies, four to five suitable candidates who are not only highly qualified but who can also be enticed away from their present attractive positions by the right offer. “We need to get all the information to carry out a thorough screening.

We interview them, take them to lunch and check references for any warning signs. In short, the basic principle of executive search the world over is that, you cannot afford to cut corners,” he explained.

Mr. Saleem also said that ESL is different from other recruitment agencies in that it identifies and approaches the best candidate instead of relying on individuals to approach the organisation. ESL was established 10 years ago and for the last 5 to 6 years has been in high demand throughout the the country.

“Our company also has a data base at around 7000-8000 listings of individuals to draw from and we find that more and more middle and top level managers approaching us to be included in our database,” said Mr Saleem.

Commenting on the success rate, he said it was around seven out of ten vacancies, which amount to around 10-12 recruitments a month. Mr Saleem added that Head-hunting was a time-consuming operation often taking up to a month to fill one vacancy.

The difference is that ESL studies a person, his personality, and his potential instead of limiting it to a look at the candidate’s CV. “When the need arises we meet the candidate not once but a few times to be totally satisfied before he is recommended to the prospective employer, said Mr. Saleem.

The boom in the regional economies has meant that more and more private companies were coming up or expanding and a lot of multinational companies are also entering the region. They require individuals with experience in specific fields and academic qualifications and are prepared to offer attractive packages to the right candidate. Most of ESL candidates are entering the job market with the potential of earning Rs 25,000 - 150,000 a month while there are also exceptions occasionally, added Mr Saleem.

Strong resistance shown at winding up of company

Forbes Ceylon has warned Asia Capital that any attempt to wind up the company by Asia Capital will be strongly resisted, and its directors will be held liable for punitive damages for submitting a spurious winding up application to the courts.

Forbes Ceylon was replying a letter from Asia Capital sent to Forbes Ceylon in March (See The Sunday Times Business April 6 ‘Asia to seek legal remedies against Forbes’), in the continuing battle among the three companies.

While Vanik has reportedly had discussions with foreign controlling shareholders of Forbes Ceylon to gain control of the company, Asia Capital which is a minority shareholder of Forbes Ceylon has protested against the move. Asia also offered to purchase Vanik, which is currently stalled due to the matter going to courts.

Forbes Chairman R. Langley said if a winding up was justified on the grounds that Forbes was trading below its net asset value per share, a number of companies in the Colombo Stock Exchange should also be liquidated including Asia Capital itself which issued shares to the public at Rs 30 and is currently traded at Rs 8 and has a net asset value of Rs 12.

The letter also denied that Forbes Directors Ajit Jayaratne had faced a conflict of interest in respect to Vanik’s negotiations with foreign shareholders of Forbes Ceylon.

“Forbes Ceylon Limited repudiates your malicious references to Mr. Ajit Jayaratne,” the letter said.

“At no time did Mr. Jayaratne represent Vanik in any discussions detrimental to the interests of Forbes Ceylon Ltd.

The allegation that he traveled to USA with Mr. Justin Meegoda for such a purpose has no factual basis, the letter said.

“The Board of Forbes Ceylon does not consider Mr. Jayaratne to labour under a conflict of interest, the letter added.

“More-over Mr. Jayaratne is only one of eight directors of Vanik and only one of 10 directors of Forbes Ceylon Ltd.”

The letter added that at the EGM of Forbes Ceylon Asia Capital’s chief Executive Ian Hardy had not been permitted to speak because Asia Capital had failed to authorize him to speak.

Forbes Ceylon said the suggestion in Asia Capital’s letter that Vanik was planning to sell leases of ‘uncertain value’ to Forbes Ceylon and then use the sales proceeds to gain control of Forbes lacked meaning and sense.

“To confound matters more you have totally contradicted the above statement in the very offer made by your organization to purchase all shares of Vanik wherein in the Offer Document you state explicitly “Asia Capital Limited believes that Vanik does have attractive core businesses, being, in particular leasing...”.

The letter commented that Asia’s recent line of attacks on Forbes Ceylon appeared to stem out of it being frustrated in its takeover id of Vanik.

“We might remind you that as recently as last November, the shareholders re-elected the entire board of Forbes Ceylon without any dissent, thus affirming their confidence in the integrity and competence and sense of duty of each member of the Board individually and the Board collectively.”

Asia’s letter contained a large number of half truths, untruths and inaccuracies, the Forbes Ceylon letter said.

“In fact as you yourself concede, it is borne of rumours,” Forbes Ceylon said. “Forbes Ceylon has up to date not received, discussed or negotiated any proposal form Vanik. We wish to emphasis that these rumours are being converted by your imagination into so called on-going negotiations between Vanik and Forbes Ceylon Ltd.”

Flux in the Money Market

The impact of a tight monetary policy is almost immediate. A relaxation of monetary policy takes time to have an impact on the economy. The time lag depends on the particular circumstances of the financial sector.

Early this year the Central Bank reduced the statutory reserve requirement by 1 percentage point and followed it up with a further reduction of 2 percentage points. Thereby the statutory reserve requirement, which was 15 per cent last year, has been reduced to 12 per cent this year. This reduction in the reserve requirement has lowered interest rates slightly. The reduction in the Treasury Bill rates has had a greater impact in reducing interest rates.

The Treasury Bill rate which was setting interest rates in the country has a lesser impact now. The on-lending rates of banks are now more dependent on their cost of funds. Unfortunately the reductions in the statutory reserve requirements are unable to have their full impact as the two state banks, which dominate the banking sector, have high mobilisation and administrative costs.

The margins are estimated to run at around 5 to 7 percentage points for the two state banks. Consequently their cost of funds is as high as 15 to 17 per cent. Hence a reluctance of these banks to drop their interest rates. This gives the other banks a bonus. They are able to lend at the higher rates owing to the inability of the state banks to lower their rates.

Despite these developments there is another factor operating in the money market. Since liquidity is high in commercial banks, they are keen to lend their funds to good borrowers at low rates. The competition to lend these liquid funds has resulted in private banks lending prime customers at low rates of interest.

In fact in some instances the short term liquidity in these banks has made them offer funds at fluctuating rates very cheaply - at small margins above call money rates. Yet, the fact is that while prime customers are able to borrow from these banks at low interest rates, the bulk of bank borrowing still continues to be at fairly high rates. The villain of the piece is the high administrative costs of state banks whose lending accounts for around two thirds of total credit.

There is another aspect of the current money market situation which is of significance. While short term rates are cheap, banks are reluctant to lend medium and long term at these rates. They fear that the current monetary policy pursued by the Central Bank is not sustainable owing to the large budget deficit and the government’s need to find resources. Consequently the medium and long term rates have not shown a significant dip. It is this same reason which makes it difficult for the Central Bank to sell its long term bonds at low rates of interest.

The fairly sudden reversal in monetary policy has also left some institutions in difficulty. Where institutions have borrowed long term they are stuck with high rates of interest in a market where rates are falling. There has also been a dip in deposit rates with most institutions dropping their deposit rates by 1 percentage point.

In most cases this means that deposit rates are lower than the inflation rate and depositors are receiving a negative real rate of interest. This could be injurious to savings mobilisation which is essential to find funds for investment. However one must admit that the bulk of savers in the country are not that interest sensitive and may not be deterred by the fall in deposit rates.

The fall in Treasury Bill rates and deposit rates are having a beneficial impact on the stock market. Domestic investors are no doubt shifting funds from the banks to the stock market. The boom in share prices is a further incentive to such shifts in funds.

What all these factors imply is that the money market is in a state of confusion and that is not conducive to an adjustment by investors to the new situation. Businessmen and investors may await a stabilisation in the money market situation in order to make their long run decisions. What requires to be stressed is that the Central Bank should not adopt a stop-go type of monetary policy and must continue to sustain its current policy of reducing interest rates rather than return to its earlier policy of a high interest rate regime to control inflation. Inflation may have to be controlled by other means. But does the Central Bank have such a choice?

State banks: should they be privatised?

By a special correspondent

The Central Bank has categorically recommended the privatisation of the state banks (with the restructuring of the banks as a second best) The reason for the recommendation in the Central Bank’s Annual Report for 1996 is that privatisation is the best way the two banks could improve their operational efficiency. Inefficiencies have caused high intermediation costs which in turn allow other banks to keep their lending rates high.

The Central Bank acknowledges that privatisation of state banks is a delicate issue. It may not be immediately feasible as a great deal of preparatory work would have to be undertaken. Meantime the public and the employees of the two institutions should be made aware of the potential benefit of privatisation. Voices have been raised, since the publication of the report, against privatisation. In fact the anti-privatisation lobby has been active since a former prime minister made the astounding statement that the Bank of Ceylon and the People's Bank were insolvent, and privatisation was heavily hinted at. Admittedly, much has gone wrong in the two institutions. 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. As a result, as the Commission observed, both banks have very high levels of non-performing loans. In order to deal with this particular problem an astounding proposal was put forward by the Government (more astounding than the “insolvency announcement”) that the secrecy provisions applicable to the two banks should be relaxed in order that the names of the large defaulters could be made public. Such an extraordinary measure would surely have intruded on the time honoured secrecy obligations of banks. The difficulty of loan recovery was attributed to the lack, or the insufficiency of, collateral. But how can their exposure to the public gaze induce borrowers to pay back their loans when they apparently cannot do so?

Host of problems

Non-performing loans are not the only problem. The banks face a host of others. The Commission has drawn attention to high intermediation costs, affecting profitability. Intermediation costs consist of financial costs and administrative costs and the latter as a percentage of total income were in 1989 4 to 7 percentage points higher than those of the private banks. The high administrative costs have been attributed to the high levels of staffing and hence high employee related expenses. The Commission also points out to the inadequate levels of provisioning which have enabled the two banks to project an image of finanical stability.

A further unsatisfactory feature highlighted by the Commission is the large percentage of loss making branches 11 percent of total branches in the case of the Bank of Ceylon and 26 per cent in the case of People’s Bank incurred losses in 1990. The Commission also pointed out that the capital/asset ratios of the two banks were much too low (1991) and “are unacceptable by international banking standards.”


The realisation that the banks were undercapitalised caused the government in 1993 to infuse a total of Rs. 24 billion to the capital base of the two banks in the form of interest bearing government bonds. At the same time the two banks signed an agreement with the Finance Ministry Secretary. These arrangements were said at the time to be a part of the restructuring of the two banks to enable them to have a commercial focus without their having to be privatised. The government agreed not to intervene in the daily operations of the banks, but that if the government required the banks to grant any loan, which would not ordinarily be granted on commercial criteria, the government would provide a time-bound written guarantee for the amount of the provisions required in terms of Central Bank guidelines. On the part of the banks, they would observe rigid standards of discipline and profit targets, the directors agreeing to resign if they failed to achieve the profit targets.

It is evident that the government is fighting shy of privatisation and is resorting to measures which it would like the public to see as the “commercialisation” of the two banks. But these measures themselves are questionable. As regards the government taking responsibility for loans granted at its request by way of time-bound guarantees, this is bad banking. Loans should be granted after due appraisal of the purpose for which they are sought and on an assessment of the creditworthiness of the prospective borrower, not merely on security considerations, such as the provision of a government guarantee. It is also bad banking because the banks would grant loans in response to a request of the government which they may otherwise not have granted. The thrust of the agreements betrays a lack of understanding of the role of banks as financial intermediaries who should be left alone to devise and implement their credit extension proposals.

Such guarantees also violate the principle of public accountability of funds as they are not given after parliamentary approval. Guarantees are made good later when parliament finds it a fait accompli.

The Finance and Banking Commision said that both the state banks and the private banks had made representations to the Commission about the “uneveness” of the playing field, the former drawing attention to the constraints under which they have had to operate, the latter complaining about the favoured treatment accorded to the state banks. The Commission took the view that if the state banks were able to compete in an open market both customers and the banks would benefit in the long run.


An attempt was made throught a provision in the Banking (Amendment) Bill to place the Bank of Ceylon and the People’s Bank on a level playing field with the other commercial banks. But at the Committee stage of the passage of the Bill in parliament the provision was withdrawn and the status quo was preserved.

Admittedly, the two banks need to be revamped. Various suggestions have been forthcoming as to what should be done. One proposal is that the bad debts of the two banks should be hived off to a newly created institution or institutions so that the two banks can make a fresh start, so to speak. Conversely, the two banks could be given the sole function of debt recovery operations and their profitable and viable business transferred to two new institutions. These were the suggestions made by the Commission. The Commission stressed that the restructuing of the banks needs to be complemented by organisational and managerial reforms “by providing for autonomy of management and operation on commercial principles even while state ownership continues.”

But it is arguable whether, whatever stipulations are laid down and mutually agreed upon by the two banks and the government, a directorate appointed by the government can be effectively insulated from government interference. State banks have little option but to follow the dictates of the government. Each government will blame the previous one for political interventions but act similarly to help their own supporters. Government intervention has resulted in overstaffing, substantial non-performing loans, high intermedition costs and other unsatisfactory features in the financial performance and managerial functions of the two banks.

Would privatisation be the answer? The Central Bank says it would. Most analysts too think so. Will the government heed the advice of its principal economic adviser.

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