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by Channa Kasturisinghe

In the backdrop of three top Government Ministers calling upon the heads of leading commercial banks to reduce lending interest rates for the benefit of the public, the business sector has highlighted the absence of a strong capital market to challenge the dominance of the banking sector in Sri Lanka.

The former President of the National Chamber of Commerce of Sri Lanka Chandra Embuldeniya addressing a seminar in Colombo last week said that banks remain exceptionally profitable while maintaining unusually high interest spreads notwithstanding the consequences on the struggling economic development of the country.

He stressed the importance of a healthy and efficient finance sector for the country and reforms as envisaged in the Regaining Sri Lanka strategy should be implemented as early as possible.

"In the absence of a bond market or any alternate funding instrument, Sri Lankan companies are largely dependent on bank finance for entrepreneurial activities and this has caused the banks to become complacent while earning high profits in a captive market," Embuldeniya said.

He also said that the plight of the small and medium-scale sector, which is the largest employment generation sector in the country, is aggravated by the absence of mechanisms to address their funding needs in a more meaningful manner. The seminar on 'Interest Rates and Competitiveness of Sri Lankan Enterprises' was organised by the Ministry of Enterprise Development.

However, expressing the bankers' point of view on `low interest rates' Managing Director of the Hatton National Bank Rienzie Wijetilleke said that his bank has passed down benefits of low interest rates to its customers to the best of its ability and further reduction has become difficult due to high non-performing loans and operational costs "Today all complains about high interest rates are made by the middle sector borrowers which, forms a majority of our borrowers.

They should understand that banking in Sri Lanka today is not just borrowing or lending but an exercise of taking risk. As bankers we will always look at price and risk factors and we operate on that basis that every other factor is secondary," Wijetilleke said. He said that about 25 percent of borrowers are wilful defaulters and therefore the banks have to be extra careful in lending. "There are three categories of customers. One category is made up of customers who borrow with the commitment to pay back to the bank. There is another category of customers who would not take repayment of loans seriously. The third and the worst category of the customer is those who come to our banks to borrow with the sole intention of not paying back," Wijetilleke said.

Commenting on allegations of high interest spreads Wijetilleke said that although interest rate spreads of some countries are in the region of 2 to three percent the commercial banks in Sri Lanka find it difficult to keep the interest spread below four percent.

"Interest rates is only a minor area of a macro problem. We have to consider our costs and delays in recoveries. We have to maintain best standards as a bank and provide all the incentives to our staff. Delays in recovery is most apparent when it comes to government departments which more often fail to make loan repayments. At the same time we have to meet the capital adequacy requirement of the Central Bank. We have difficulty in replenishing our capital as regularly as we would like to," Wijetilleke said.

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