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Present global financial crisis:

CB prudency saves Lanka

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.

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.

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