Giving credit where it is due
Sri Lanka’s traditional banking sector has received several shocks
over the past year or so, most prominently in the form of the trust
placed in the non-formal financial sector by a large number of
individuals and companies.
The Sakvithi scam and more recently the Golden Key scandal have
revealed that the traditional banks have not succeeded in attracting a
considerable segment of the market with new, innovative ideas and
instruments.
Of course, one could argue that the monies invested in shady
institutions could mostly be ‘black’ money which the depositors cannot
account for legally. Even so, there should be a mechanism to draw in
such funds to the formal economy.
It is indeed time that the traditional banking sector faced the new
challenges in the dynamic arena, where flexibility, innovation,
customer-oriented services and new technology are the key words for
survival.
The banking sector has been somewhat lethargic in these departments
in recent times, perhaps due to the volatile situation in the local and
global economy. It is in this context that we should look at the Central
Bank’s attempts to rejuvenate the banking sector.
According to the latest reports and statistics, Sri Lanka’s economy
has largely resisted the global financial meltdown, recording a growth
rate of around six percent which is highly commendable in the current
environment. Inflation, for example, has declined. In view of this sharp
decline in inflation, the Central Bank has commenced relaxing its
monetary policy stance and has taken several measures to enhance
liquidity in the market.
The penal rate of interest imposed on reverse repurchase transactions
with the Central Bank was reduced gradually from its initial rate of 19
percent to 14.75 percent.
In addition, the Repurchase and Reverse Repurchase rates of the
Central Bank have also been reduced by 25 basis points each to 10.25
percent and 11.75 percent, and the Statutory Reserve Ratio (SRR)
applicable to rupee deposit liabilities of commercial banks has been
reduced by 300 basis points to 7 percent, by January 2009 to inject
fresh liquidity to the market.
Liquidity shortfalls faced by commercial banks are being addressed by
releasing liquidity through open market operations conducted by the
Central Bank. All these are commendable measures that could spur the
banking sector to achieve more ambitious targets. The bottom line is
that these measures are intended to have a significant impact on all
interest rates in the country so that the growth in private sector
credit could be maintained at a desirable rate.
Nevertheless, it has been revealed that the rate of growth in credit
to the private sector has declined sharply to 6.4 percent in January
2009 from 7.9 percent at end 2008.
This situation is certainly not conducive to the healthy progress of
our economy which depends on the private sector as the ‘engine of
growth’. The Central Bank has now called upon commercial banks to
enhance lending activities immediately so that the credit flow to the
private sector is ensured and economic activities islandwide are
supported.
Banks should not forget the Small and Medium Scale enterprises in
this regard while lending to the major corporates.
They play a very significant role in the economy and gain new export
markets as well. They also make good use of the loans granted to them
and expand operations rapidly. Export industries should also be
encouraged through a regular credit flow.
Another important segment will be private enterprises setting up
construction and in due course, investment projects in the North and the
East, emerging to the economic limelight after decades of darkness.
Funding their operations will help stimulate the region’s economy,
which is already being integrated with that of the rest of the island
thanks to newly opened road links.
The service and utilities sector should also not be neglected, as it
is one of the fastest growing segments of the economy. Banks must
identify high-priority, high-growth areas in the private sector and
offer tailor-made products to enhance their progress without necessarily
waiting for such customers to walk in through their doors.
Such a pro-active approach is needed if banks are to regain lost
ground and become more performance-oriented players in the developing
economy.
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