CB's foresight saves banking industry

The Central Banks far-sighted measures helped to protect the Sri Lankas banking sector from the current financial crisis that is sweeping the world, Deputy Central Bank Governor in charge of financial sector stability Ranee Jayamaha said.

"We have been cautious and watching the trends and be able for banking sector to be well capitalised to meet upcoming challenges, Jayamaha said at a forum last week at the Central Bank.

She said that some of the reforms that the Central Bank adopted including minimum capital requirement for commercial banks, focus on local bank and other financial institutes exposure to foreign investment and good governance prevented a major crash in the sector. "Therefore, understanding the external market scenario we have noticed an asset price bubble developing in 2006 and had tightened rules on mortgage and credit card lending in Sri Lanka, she said.

Jayamaha said the minimum capital requirement of commercial banks was raised to 2.5 billion rupees. The floor for specialised banks was raised to 1,500 million rupees, and banks were required to keep to international Basel capital adequacy rules. Finance companies, which deal in 'sub-prime' lending sectors in Sri Lanka, were also closely monitored. The Central Bank had placed interest rate caps of 24.5 percent to curb borrowing and lending at unsustainable levels.

She said they have mandated the following of the Corporate Governance aspect for all banks and financial institutions changed the attitude and approach of Director Board in terms of their tasks and responsibilities of them.

Central Bank Deputy Governor W. A. Wijewardene said the Central Bank itself had placed some liquid assets with top rated foreign banks which had later run into difficulties and shifted the funds to the central banks of the countries concerned before anything happened.

"Sri Lanka's Central Bank foreign reserves rose steeply in the first quarter of the 2008 to about 3.4 billion dollars amid tight monetary policy. But now we have foreign reserves close to US $ 2.6 billion, he said.

He said that from 2007, the central bank allowed five percent of the outstanding treasury bills to be bought by foreign funds as fiscal policy deteriorated and budget deficits expanded. Later it was raised to 10 percent.