State banks and their role

Neo-liberal economists and politicians have been gunning at State banks ever since Sri Lanka embraced free market liberalization in 1977. In fact, the international financial institutions have been consistently called for their privatization. The UNF Government of Ranil Wickremesinghe that came to power in 2003 actually prepared plans for their privatization. However, it could not be implemented due to the opposition of the masses and the working people.

Today, amidst a global financial crisis that is also affecting Sri Lanka we could see that it is due to the State banks that we were spared the worst effects of the crisis. It was only last week that the State banks lowered the lending interest rates, suspended the penal rates on a directive by President Mahinda Rajapaksa.

As we have stressed in this column earlier, this reduction would be a stimulus for investment and development. Entrepreneurs have welcomed it as a long overdue necessary measure. It would also be a relief to many who had obtained loans or are contemplating to apply for loans. Public servants would be a considerable section of the public that would benefit from this measure since public servants’ loan scheme has also been revived.

The private sector is supposed to be the engine of growth. We are yet to witness this engine running. The State banks were accused of inefficiency and corruption. We find the private financial sector, including private banks in a worse State.

We have seen how mismanagement and fraud had made the Pramukha Bank defunct and how several finance companies swindled the deposits of the public. Among them were those run by private sector giants. Only the intervention of the State, especially the Bank of Ceylon saved the Seylan Bank from crashing. Under State management it has made a turn around. So much for the efficiency and good management of the private sector and the opposite in the State sector.

Even abroad, the record of private banks was no better. We have seen how huge banks like the Bank of Scotland had to be taken over by the Government in the United Kingdom. The same is true of the United States and several other developed countries which were looked upon as the acme of perfection.

In Sri Lanka it is the State banks that traditionally supported the peasant, the self-employed, the small and medium entrepreneurs, small traders etc. The private banks mostly confined to the metropolis and a few other cities served the captains of industry and commerce while the State banks catered to the rural areas and the middle classes. The role of State banks in financing agricultural development is immense.

Historically these banks arose due to objective demands of development. The Bank of Ceylon, the first national bank was established on the eve of winning independence, to serve the nascent native entrepreneurs who were buying colonial property and were starting business on their own. It served “Ceylonization” endeavours following independence.

The People’s Bank was established in the aftermath of the people’s victory in 1956 and it played a crucial role in the early industrialization phase in the 1960s and 1970s. The National Savings Bank established in the mid-1970s merged the Ceylon Savings Bank and the Post Office Savings Bank and is today the premier savings bank in the country. The State Mortgage and Investment Bank is also the leader in its specialized field.

In the new stage of development into which the country is entering now, after the defeat of terrorism, the State banks have a vital role to play, both in financing development projects and harnessing savings. Sri Lanka has a low savings rate around 20 percent of the GDP. This is hardly sufficient for any developmental take off. It should be increased at least upto 30 percent.

This does not mean that the State banks are all perfect. There is much room for improvement, especially in the fields of customer care and introduction of state-of- the art technology. The lethargy common to all public sector institutions also afflict the State banks. It has to be done away with. So is wastage which needs to be minimized, if not eliminated altogether.

This also calls for better regulatory practices from the Central Bank, which recently earned some flak for the failure to prevent the collapse of several financial institutions.