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The Pramuka Bank suspension is on the minds of the country's business community these days and so it should. The Central Bank of Sri Lanka (CBSL) has suspended the operations of the bank for a sixty-day period pending investigations into its liquidity position.

The CBSL has used the powers of the Monetary Act to carry out this examination. Such action is rare in Sri Lanka and therefore cause for comment.

The CBSL's actions are welcome. Primarily the Central Bank must act in the interest of the depositor who can be affected if banks fail. This time the intervention has been triggered by the CBSL's banking examiners who say that Pramuka is ill liquid and insolvent as the ratio between its non-performing advances and its deposits is too close for comfort. The CBSL contends that if this position is confirmed during closer examination of Pramuka's books, then the directors would be asked to liquidate. Pramuka meanwhile contests this position saying that its liquidity is sufficient.

No doubt the investigation would reveal the facts and this current period, during which the probe is being conducted, will be one of anxiety for Pramuka's 15,000 depositors.

In the meantime, it is important to examine comments made in his defence by Rohan Perera, the Pramuka Chairman, to our reporters on Sunday. He said the economic downturn had badly affected Pramuka's customers. They were not able to pay up in full, although they were repaying small amounts. "We are being considerate about the businessmen. If we insist on full payment we might kill them off," Perera said.

This comment brings home the seriousness of the problems the economy has faced since last year. A combination of political instability, adverse world market conditions and the drought affected the economy to the extent that in 2001 this country experienced its first recession since independence.

In an environment where the economy runs backwards Banks have to in industry parlance, take a haircut. In other regional economies when there were recessionary years, banks suffered greatly. It was surprising that in Sri Lanka commercial banks continued to show profits despite the highly adverse macro economic situation. That is mostly because the normal margins enjoyed by Sri Lankan banks are higher than their counterparts elsewhere.

The question on the minds of most of the business community now is whether the Pramuka crisis will result in problems for the financial sector as a whole. It is true of other countries where banks have failed that the entire financial system is forced to cut profits because of the normally close relationships the banks maintain with each other.

In Sri Lanka this should not be the case particularly because of Pramuka's situation. It is a Licensed Specialised Bank, which cannot carry out commercial banking and most importantly issue cheques. Therefore there is unlikely to be a chain reaction.

However the crisis is there and awareness of it is critical. Banks have been reporting more defaults on loans and the advertisements for parate payments are increasing. In this environment it is important for the country's banks to show sensitivity to the situation and cut down on the costs of finance. If they continue to maintain parameters that are best suited for better economic times, then, as Perera said the businessmen will be killed off.

We are not advocating sympathy to the extent that the bank's haircut extends to a scalping of the depositor, but there would have to be greater flexibility.

Otherwise businessmen will not be able to recover to the point at which they will be able to pay back their loans in full, and also get the economy rolling once again.

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