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By Chandani Jayatilleke

Through privatisation, the People's Bank hopes to be lean, mean and equipped to take on the challenges of banking in a competitive modern environment. "Privatisation will not only strengthen the bank's financial base but also make the employees and customers shareholders of the bank," its chairman, Lal Nanayakkara told the Daily News in an interview. Excerpts from the interview:

Question: The People's Bank in its recent annual report said that it earned a profit of Rs. 308 million, ending the financial crisis on a favourable note. But now there is a proposal to privatise the bank on the plea that it is in severe financial trouble. There is a contradiction here, isn't there?

Answer: Though the bank recorded a profit of Rs. 308 million for the year ending March 31, 2002, we expect a loss of around Rs. 500 million at the end of the current financial year. The current negative net worth in the balance sheet amounts to Rs. 6 billion. Financially this is a very unfavourable situation. The current Non Performing Loans (NPLs) stand at Rs. 25 billion. A good part of these loans had been given due to political influence.

Out of Rs. 25 billion, Rs.2.5 billion was given on Government recommendation. However, going by the present economic situation in the country, the Government is not in a position to provide funds any more.

The Government itself is facing a serious financial crisis and has difficulty in paying salaries to public servants and pensioners. In 1993 and 1996, the Government provided extra capital to the Peoples' Bank but it is not prepared to provide capital for the third time. Therefore, the bank has to find other ways to raise funds and face the challenges in an extremely competitive banking scenario. We need to be as competitive as other private commercial banks in the country. The bank should be free from politicisation. But to assert our independence, we should have sufficient capital.

Q: Is privatisation the only solution? Hasn't the Board of Directors thought about any other alternative?

A: The People's Bank has the largest number of customers with 562 branches islandwide. Customer deposits account for about Rs. 127 billion. We must remain confident and retain their confidence and trust. Therefore, we need to financially strengthen the bank by bringing in new investments. If we cannot find finances, the Central Bank may even withdraw the banking licence issued to People's Bank. In that case we have no alternative but to go for liquidation. However, we don't want to go for this option. It is detrimental to our employees and customers. Besides, exorbitant liquidation would cast a heavy burden on the government.

Q: The bank has been lamenting that loans are given due to political pressure all the time. What measures have it taken to recover this money? Why can't the names of the defaulters' be disclosed?

A: It is unethical to disclose the names of such customers and it is a violation of the accepted tenets of banking practices. But we are trying to recover as much as possible. But recovery is not a simple procedure. The present law favours the borrower rather than the lender. We have regularised the loan procedure now. All the applications for large loans are being evaluated by a Board Executive Credit Committee consisting of Board members.

We have taken measures to minimise risks in NPLs when issuing loans. The Government has also given us instructions to issue loans only on a commercial basis. Since government institutions have been allowed to take loans from other commercial banks, we hope that the loans taken by state institutions from state banks will be reduced drastically. At present, the bank's NPLs are about 22 percent of the loan portfolio.

Q: How do you plan to increase the bank's profits?

A: First of all we have to be competitive and run the bank as a private sector organisation. But, the biggest challenge we are facing now is our cost income ratio which stands at 87 percent (When the bank earns 100 rupees, 87 rupees is spent as expenses). This is a very high rate. Our plan is to reduce this to 74 percent in 2003 which is still high. The ideal cost income ratio is anything below 60%.

Q: What measures will the bank take to bring down costs?

A: One major option is to bring down the number of staff. Currently we have about 11,400. While our staff consists of a considerable number of efficient members, it also consists of unproductive employees - some of them have even got extensions up to 60 or so. Therefore, we have a new regulation to retire those who reach 55 except under exceptional circumstances. At the same time we don't plan to mass recruit new staff other than a few young and qualified people as management trainees and staff officers. This we think is necessary for rejuvenation.

Under the new retirement age rule, we plan to reduce about 800 employees a year. However, we have no plans to offer voluntary retirement schemes.

Q: What are the privatisation options considered by the bank?

A: The Board of Directors has decided to convert the bank into a Limited Liability Company and the conversion will be done through Cabinet approval under Section 2 of the Conversion of Public Corporations and Government Owned Business Undertakings Act of 1987. Among the options being considered are: the sale of shares to a single local buyer or a consortium. A public issue maybe considered as a last option. Prior to recapitalisation we plan to sell or liquidate some of the subsidiaries not directly engaged in complimentary banking activities. For instance, we have already taken steps to liquidate the People's Property Development Company.

Q: How much money is expected in bids?

A: It depends on the precise net worth of the bank acceptable to the investors. Its non-performing loans are heaved off to a separate asset restructuring company, then the net worth will be more. If the balance sheet of the bank continues to carry the outstanding loans, the net worth will come down. However, in order to wipe out the negative net worth and also to improve capital structure in order to meet the capital adequacy ratio of the bank, the bank immediately needs about Rs. 12 billion. Additional funds may be necessary to provide the bank with sufficient working capital

Q: Banking trade unions have already said that a general strike will be launched in the event of privatisation. How do you assure job security to the employees?

A: The bank will seek to ensure the rights of its employees when it negotiates deals with buyers. The buyer must ensure job security, guarantee that the organisation would be run as a banking institution and will not resort to asset stripping. I have already sent a message to all employees describing the bank's financial situation, and sought their support. I have also had several discussions with trade union representatives and even asked them to submit proposals for restructuring.

Q: What response have you received from the customers on the proposed plan?

A: Our customers have not been disturbed by the announcement so far. They continue to repose their confidence in us. We want to convey the truth to our customers and educate them on this process through our branches. Privatisation will bring more benefits to our customers in the future. In seeking fresh capital we may even offer an opportunity to our customers to invest in shares.

To overcome huge financial crisis

People's Bank, the 41-year old state bank will soon be converted to a Limited Liability Company in order to overcome its huge financial crisis. The bank hopes to obtain capital, preferably locally, failing which from international sources to strengthen the financial situation. The bank has plunged into a financial crisis as a result of imprudent lending and currently its non-performing loans (NPLs) account for Rs. 25.4 billion as at December 31, 2001. Many of these unpaid loans have been given to political favourites.

Therefore, the bank needs bids of over Rs. 12 billion plus sufficient working capital from the investors for restructuring.

The bank will also seek to ensure the rights of its employees by presenting a set of rules and regulations for any deal with the buyer. The rules include: secure job opportunities, a guarantee that the organisation would be run as a banking institution, protection for assets and a promise that its properties, which include some prime land and buildings in the city of Colombo would not be sold.

The government had earlier said that the bank was in a crisis and measures would be taken to save it. The government has been exploring options at the highest level and several alternative suggestions are being explored. Employees Unions have protested against the restructuring, arguing that it is possible to maintain it as a government institution.

The Chairman recently called upon its employees to realise the true situation of the bank, requesting their support in this endeavour. He has also had several discussions with Trade Union representatives and explained the situation.

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Copyright 2001 The Associated Newspapers of Ceylon Ltd.
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