Transcript Transforming Public Sector Banks Session II: Good Public Banks/Bad Public banks Presentation by Mr.

Transforming Public Sector Banks
Session II: Good Public Banks/Bad Public banks
Presentation by
Mr. A.S. Jayawardena
Governor
Central Bank of Sri Lanka
Introduction
1.
“Good” and “Bad” public (or even private) banks in competitive situations need
careful definition.
2.
Public perception is that good banks earn financial profits; the profits grow over
time; their capital is strengthened; they expand their business; their business is
conducted prudently
3.
Public sector banks are also expected to undertake social obligations, not usually
borne by private sector banks.
4.
They are also subject to government patronage, and tend to be bureaucratic and
inflexible.
5.
Financial profitability important for deposit raising banks.
2. The Background
1832
1885
1931
1939
1944
1955
1961
1971
1979
1995
-
Ceylon Savings Bank (CSB)
Post Office Savings Bank (POSB)
State Mortgage Bank (SMB)
Bank of Ceylon – nationalised 1961 (BOC)
Agricultural & Industrial Credit Corporation (AICC)
Development Finance Corporation (DFCC)
Peoples Bank (PB)
National Savings Bank (NSB) – CSB + POSB
National Development Bank (NDB)
Regional Development Banks (5) merging 17 Regional
Rural Development Banks (RDB)
3. Commercial Bank Expansion: BOC and PB, Two public
sector commercial banks expanded strongly since 1970s
1970
1980
2002
148
17
432
55
606
368
Employment
Public
Private
4510
n.a.
16,772
n.a.
19,626
14,409
Assets (Rs. Mn.)
Public
Private
2,338
784
18 620
7,981
386,032
401,994
Deposits (Rs. Mn.)
Public
Private
1,752
642
13,348
3,943
278,503
294,725
Loans (Rs. Mn.)
Public
Private
1,064
484
12,070
4,930
167,326
216,600
Branches
Public
Private
4. Assets of Financial Institutions
Commercial banks (50%) and investment (development) banks (11%) dominate.
BOC and PB account for 29% along with NSB (9%) and SMIB (1%, public sector banks account for 52% of financial
system assets – 55% of GDP.
By 1980, public sector bank’s share was over 80 percent.
Despite declining share, public sector banks accounted for two-thirds of loans by 1990.
5. Capital Ratios and Non-performing Loans
Non-performing loans of public commercial banks continuously and consistently higher than that of
private domestic banks, much higher than that of foreign banks.
Average interest spread between borrowing and lending rates around 6 percentage points in the
State banks.
Other commercial banks tended to follow in setting interest rates, while engaging on non-interest
rate competition.
High interest rates discouraged investment.
Table 2: Assests of Financial Institutions
Institution
Central Bank of Sri Lanka
Rs.Bn.
%
304
14.6
Institutions Supervised by the Central Bank
Deposit-Taking Institutions
1,224
62.8
942
49.6
State Banks
466
28.5
Domestic Private Bank
356
14.9
Local Branches of Foreign Banks
120
6.2
241
11.4
41
1.8
351
14.7
315
12.9
Primary Dealers
22
1.1
Leasing Establishments
15
0.7
1,574
77.5
Licensed Commercial Banks
Licensed Specialised Banks
Registered Finance Companies
Other Institutions
Employees’ Provident Fund
Group Total
Institutions not Supervised by the Central Bank
Deposit-Taking Institutions
20
1.0
15
0.8
5
0.2
122
5.6
Approved Private Provident Funds
46
2.3
Employees’ Trust Fund
41
1.8
Insurance Institutions
35
1.6
28
1.3
16
0.8
HDFC Sri Lanka Bank
5
0.2
Venture Capital Companies
3
0.1
Unit Trusts
4
0.1
170
7.9
2,050
100.0
Co-operative Rural Banks
Thrift and Credit Co-operative Societies
Contractual Savings Institutions
Other Specialised Financial Institutions
Merchant Banks
Group Total
Total Assets
Table 3: Sri Lanka: Reported Capital Ratios and Loan Quality in Banks, 1996-2001 (In percent)
1996
1997
1998
1999
2000
2001Est.
10.1
10.2
15.5
10.5
---
8.0
10.1
14.2
9.7
---
8.2
10.1
15.6
9.7
19.6
3.7
9.9
14.1
7.8
18.5
2.3
10.3
16.1
7.3
28.4
-0.4
9.4
10.7
11.8
13.1
11.5
…
10.5
11.0
13.9
11.0
…
8.6
12.5
12.5
10.7
…
8.8
12.2
12.5
10.6
18.2
4.3
11.4
16.0
8.3
17.3
0.1
10.4
18.9
12.0
10.4
15.4
20.2
12.4
12.7
16.4
19.5
13.4
10.7
16.6
18.3
15.9
12.7
16.6
15.4
14.9
13.2
15.0
18.2
15.7
9.7
23.0
-0.3
13.2
13.0
22.8
15.3
14.4
11.9
20.8
-1.6
15.4
19.3
20.7
-5.7
17.4
10.3
13.8
Core capital ratio(min.4 percent) 1/
State commercial banks
Private domestic banks
Foreign banks13.3
All commercial banks
Specialized banks
4.8
…
Risk-weighted total capital ratio(min. 9 per cent)
State commercial banks
Private domestic banks
Foreign banks13.8
All commercial banks
Specialized banks
7.8
23.4
NPLs/Total advances
State commercial banks
Private domestic banks
Foreign banks8.3
All commercial banks
16.9
Total advances (percent annual growth)
State commercial banks
Private domestic banks
Foreign banks…
All commercial banks
…
…
6.7
…
10.1
6. Banking Reforms
1. Recapitalisation of Public Commercial Banks
1993 – Rs. 24 billion – 30 year non-redeemable bonds at 12% interest. Banks issue shares
to government.
1996 – Rs. 19 billion – 12 year non-redeemable bonds at 14% interest.
Helped meet capital adequacy – not liquidity – Implicit dividend to government deducted
from interest.
Memoranda of Understanding to ensure loan recoveries, improving return on assets and
equity, commercial accounting and Boards held accountable.
Introduce limited private management.
2. Reform of Investment and Regional Banks
DFCC and NDB privatised.
RRDBs consolidated into 5 RDBs
3. Improve Loan Recoveries
7. Banking Reforms (continued)
Recapitalisation did not succeed because of inadequate commitment to reform
–
–
–
–
–
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weak loan recoveries
continuation of bad loans
failure to achieve targets
inability to reduce costs by reducing staff
continued use of the banks for government finance eg. security, loss making public
enterprises.
trade union negativism
Major Structural Reforms contemplated.
–
–
–
–
–
–
–
PB to be restructured into two – a savings and a commercial bank
BOC to be commercialised
Dispose of non-performing loans to an Asset Management Company
Private sector participation
Explicit subsidisation of social obligations
Rationalisation of excess employment
Good corporate governance.
8. Strengths of Public Banks
1. Historically significant pioneering role
- in mobilising savings – confidence and goodwill
- in deepening the financial system.
2. Developing indigenous entrepreneur class, local enterprise, small and medium sector,
as well as good bankers.
3. Success of branch expansion evaluated by the private banks. More balanced development
of rural areas.
4. Large size enables domestic and international expansion – Implicit government backing.
9. Weaknesses of Public Banks
1. Government ownership brings government regulation
- inflexible operations
- pressure for direction of credit
- pressure for employment expansion.
2. Difficulty of loan recoveries due to political pressure.
3. Lack of performance oriented incentives.
4. Negative trade union pressure.
5. Breakdown of financial discipline as they are perceived as “too big to fail”.
10. Good Public Sector Banks
- Must be financially viable
- Operating on a level playing field with private banks
- Social obligations to be identified and public be informed
- Adopt good corporate governance principles, which are accounted for,
to the owners and depositors
- Pay special attention to credit evaluation and loan recoveries
- Flexibility in operation and freedom from government regulation
- Should annually justify why they should remain under public ownership.