Present global financial crisis:
CB prudency saves Lanka
Shirajiv Sirimane
Sri Lanka would not feel any negative impact from the present global
financial crisis, said Governor Central Bank Ajith Cabraal.
Speaking to ‘Daily News Business’ he said that the Central Bank (CB)
had adhered to several meaningful steps to avoid the crisis.
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Governor
Central Bank
Ajith Cabraal |
“We have carefully formulated our economy to face crises, and today,
such policies and practices are paying off,” he said.
The Central Bank has been vigilant in maintaining stable interest
rates and exchange rate to protect the domestic economy and strengthen
it. Our exchange rate was stable for over one year now.
We have opened the Treasury Bill and Bond Markets to foreign
investors with carefully placed limits, while creating a buffer to meet
the threat of a sudden capital flight,” he added.
CB was concerned on adverse implications due to any indisciplined
lending by banks. “Because of this reason, we directed all the banks to
make a general provision of 1 per cent on performing loans and advances,
in November 2006.
We also increased the Risk Weight applicable for Housing Loans from
50% to 55% in November 2006”.
“We placed a limit on commercial banks’ borrowing from abroad to 15
per cent of their capital”.
“The Central Bank took measures to formalise and strengthen the
banking supervision activities and to educate the banks on the
management of risks. We also issued new far reaching and landmark
directions on Corporate Governance, Limits on shareholdings, Maximum
accommodation and single borrower limits, and enforced these new
directions stringently,” he said.
Internationally, the CB invested its external reserves with highly
rated international banks, basically with foreign Central Banks, and
thereby ensured the 100 per cent security and safety of its own
reserves.
We absorbed an additional US dollars 600 million from the foreign
exchange market, in the first 8 months of this year.
This has enabled the Central Bank to supply such foreign exchange in
a situation where there is a need to supply external funds into the
market to keep it stable.
He said that these foresight decisions were criticised by the
business community and today the CB has been proved right”, he added.
“Notwithstanding all these efforts, if this global crisis prevails
for a longer period and many countries suffer from recession, Sri Lankan
exports too could be affected, although in a limited way because of the
nature of our exports.
Therefore, exporters have to be vigilant about the situation and take
the necessary measures to handle such an eventuality, and continue to
improve their productivity.
Commenting on the Sakvithi scam he said that CB is not in a position
to bail the depositors since the company was not registered unlike the
Pramuka Bank.
“We had intensified our investigations and it was during this time
that the company folded up”.
He also questioned the wisdom behind the depositors in taking a risk
when the CB had clearly advertised (to the turn of Rs. 2 billion)
informing the names of genuine financial institutions “The public passed
a considerable number of registered banks and finance companies before
going to illegal and unregistered bodies,” he said.
The ongoing financial crisis originated as a result of the subprime
mortgage crisis (SMC), erupted in mid 2007. The SMC erupted due to the
bursting of the US Housing Bubble and high default rates on “Sub Prime
Mortgages”, beginning 2006.
The major cause for this financial crisis was the reckless providing
of loans by financial institutions, particularly to the housing sector,
without proper supervision, and the resulting eventual bankruptcy of
such financial institutions.
In other words, this is a turmoil that had been caused by the grant
of loans to “bad creditors”, considering them as “good creditors”.
The SMC became more apparent during 2007 and 2008, and has now
resulted in contracted liquidity in the global credit markets and
banking system. |