Sri Lanka’s six state-owned banks are set to undergo urgent reforms due to current pressure exerted on its capital positions from massive amounts of bad loans and urgent funding as well as liquidity constraints, informed official sources said.
These local banks need Rs. 1.4 trillion capital injection after bad loans increased to alarming proportions in economic crisis and debt moratoriums as well as debt restructuring hit their balance sheets, a recent analysis by the International Monetary Fund (IMF) revealed.
Bank of Ceylon, HDFC Bank, National Savings Bank, Pradeshiya Sanwardena Bank, People’s Bank and Regional Development Bank are included in the SOE restructuring unit’s list of 31 state-owned enterprises (SOEs).
With the IMF technical support and new funding, the Central Bank and the government will be better placed to grant capital injections if required to strengthen the bank, a senior Finance Ministry official divulged.
Under IMF guidelines, weaker banks are likely to be merged with the stronger banks while restructuring of struggling state-owned banks is also considered as a possible option, he added.
The Central Bank (CB) has not been informed about any decision to divest state banks, CB Governor Nandalal Weerasinghe told a media conference recently.
An inter-ministerial SOE policy committee will be established under the proposed SOE Law which will advise a holding company on wider government policy issues, approve the acquisition of an SOE or approve the divestiture and winding up of an SOE.
The SOE Policy Committee will be established under the chairmanship of the President, and it will include as members ministers of finance, investment promotion and labour, the CB Governor, the Secretary to the Treasury and the Chair of the Holding Company.
The state banks diagnostic exercise aimed at assessing the impact on banks’ capital from asset quality deterioration, forex deterioration and sovereign default has now been completed, an official said.
The CB has been directed to develop a roadmap for financial sector restructuring and recapitalisation, to address capital and liquidity shortfalls identified through the diagnostic exercise by next month, he disclosed.
The Ministry of Finance will determine the size, timing, instruments, and terms and conditions for potential government recapitalisation of viable banks which are unable to find capital from private sources by January 2024.
Source: Sunday Times
