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Sri Lanka’s State Banks; Reform and Robbery

The two largest state banks, Bank of Ceylon and Peo­ple’s Bank, at one time a huge drain on the treasury, are no longer making losses after reforms initiated in 1996 that strengthened their governance.

By the mid-1990s the two state commercial banks were insolvent and was bailed out twice with capital injections from the Treasury.

The Public Enterprises Reform Commission, headed by Mano Tittawella, reformed the two banks.

The top management of People’s Bank was strength­ened with key staff recruited from private and foreign banks and a CEO was hired from overseas, to insulate the banks from politically directed lending.

The Bank of Ceylon recruited a Chief Financial Officer from overseas.

These reforms were continued after a change of ad­ministration in 2001. New lending to state enterprises were backed by Treasury guarantees, insulating the two banks from losses, but passing the buck to the tax payer.

Over the last several years Bank of Ceylon and Peo­ple’s Bank have paid steady dividends to the Treasury, contributing more than half the dividends of all state firms.

But over half of the loans of Bank of Ceylon goes to the state or state enterprises, according to Fitch Ratings. National Savings Bank also lends a bulk of its collec­tions to the state to finance a runaway budget deficit, crowding out ordinary citizenry.

Sri Lanka Insurance Corporation, which returned to the government after a period of private ownership is still making profits and paying dividents. In sharp contrast, SriLankan Airlines slipped back into losses immedi­ately after Emirates Airlines, its managing partner, handed over management to the state.

Bank Robbery?

Following reforms made to the two state commercial banks, the listing of National Development Bank on the stock exchange and the tightening of the Credit Information Bureau, politicians called for a new state bank to be established.

A key rallying call during the 2004 and 2005 elections was that the ‘development banks’ were privatised and a new bank was needed to help local businesses. Following the elections, SME Bank was set up in 2005. Lankaputhra Bank was set up in 2006.

Borrowers with poor credit records who were no longer welcome at the Bank of Ceylon and People’s Bank quickly flocked to the new banks. Questions have been raised why these banks were not members of the Credit Information Bureau initially.

In December 2006, less than two years from incep­tion, the SME Bank was in trouble after granting dud loans, and plans were announced to merge it with the existing Regional Rural Development Banks (RRDB). At the time, Fitch Ratings warned that 30 percent of loans at SME Bank had already gone bad and put the RRDB on rating watch. The plan to merge and infect the better performing RRDB’s with bad loans was then abandoned.

Shortly after, when Lankaputhra Bank’s loans also went bad, the two banks were merged and tax payer funds were infused to recapitalise the entity. In 2015, information about new scams at Lankaputhra Bank emerged.

In one case the bank had given a loan to a gem and jewellery firm taking quartz as security, members of a new board told the media. Land belonging to third parties including a temple as well as leased land had been accepted as collateral, allegedly on the instruc­tions of a senior state official. Hundreds of millions of loans had been given on political direction which had not been paid back.

Question of Accountability

A private company is owned by shareholders who pump their own money in and the board of directors – some of whom are themselves shareholders – keep an eye on the management.

A state enterprise is set up with public money. Though the public and taxpayers are supposed to be share­holders, the management is answerable to politicians, who have no direct stake in the business.

Politicians have no compulsion to save money or make profits. Their natural incentive is to mis-use the resources of state enterprises to win votes or support their friends who helped with the election campaign.

Indeed, it is often the financial backers of politicians who are made directors of state enterprises. Politi­cians also block management from making optimal decisions, whether in pricing energy or deciding which route to fly, as past experience has shown.

Politicians also routinely make public statements say­ing state enterprises are supposed to provide a service and justify losses and mismanagement.

In Sri Lanka hardly anyone is held accountable for losses at SOEs, though the parliament’s Committee on Public Enterprises has reported on it. The lack of an independent public service makes this worse in Sri Lanka. Therefore, the dice are fundamentally stacked against state enterprises from the start.

This may explain why some enterprises become prof­itable and start contributing tax revenues to the state after privatisation. A good example are the privatised plantations. Companies that formerly received Trea­sury handouts to pay salaries started paying annual lease rentals to the public purse despite the vagaries of commodity prices.

Privatisation did not always restore a a company’s profitability, some companies went bankrupt after privatisation. Three textile firms which depended on import protection collapsed after import duties were reduced. However the falling textile prices benefitted consumers.

Inefficient firms, protected from competition, be­ing weeded out is also a benefit to the people of the country, quite apart from whether they make profits or losses.


One of Sri Lanka’s most successful cases of pri­vatisation was Telecom. Telecom was a unionised monopoly. Unions blocked the creation of a duopoly. Tariffs were controlled by the government and people had to wait on a 10 or 15 year waiting list to obtain a phone connection . Politicians or government servants were given priority. Ordinary people got the standard answer: ‘no loops’, just as Colombo Gas used to say ‘no cylinders’.

In the 1990s, the monopoly was broken first by bringing a private partner to run a mobile service. New licenses were issued for mobile services, later two wireless fixed operators were licensed. The regulator allowed prices and connection fees to rise. A large stake in Sri Lanka Telecom, the former state fixed line operator was sold to a foreign company.

Some of the foreign telecom firms that invested in Sri Lanka, including those from Malaysia and Sweden were themselves state enterprises or stock-market listed former state enterprises, which competed with each other in Sri Lanka.

Before private capital was allowed into telecom, a major constraint for investors who wanted to start factories in Sri Lanka was the lack of telephones. But now some people own more than one phone. Prices are among the lowest in the world. Competition has become so intense that private operators successfully lobbied the regulator to stop prices from going down, and imposed floor prices in a blatant move to hamper the effects of free markets and competition.

Over the years unfortunate consumers have had to put up with anything from bad customer service, rusty gas cylinders, routine shortages, 10 year waiting lists and adulterated fuel. Yet vocal and articulate politicians backed by SOE unions are pushing the agenda to build state businesses at the expense of the people.

And so far Sri Lanka’s ordinary people who pick up the tab have been listening in silence.