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Government to protect two state banks from capital adequacy issues 

Two state banks are to be protected as national assets with alternative proposals on preservation and maintenance of banking institutions, Prime Minister Dinesh Gunewardena.  

He made this comment at a discussion with trade union representatives which was held at Temple Trees recently. Trade Union activities and institutional issues were discussed during the discussion.

The representatives of the trade unions presented many points regarding the restructuring of institutions, alternative proposals on preservation and maintenance of institutions.

The government has devised a plan of rescue to safe guard Sri Lanka’s two key state owned banks, the Bank of Ceylon and the Peoples Bank in light of capital adequacy challenges, the Committee on Banking and Financial Services recent report revealed.  

Finance ministry has already taken precautionary measures to tackle the impact on capital position of these two banks following the potential debt restructuring of state-owned enterprises amounting to US$ 3,739 million by the end of 2022.

This has pushed the two state banks apparently towards the debt risk exposing capital adequacy problem.  

In this context, the committee has recommended to consider recapitalising these two banks through institutional investors, such as the International Finance Corporation (IFC) and Asian Development Bank (ADB).

Moreover the treasury has allocated Rs.450 billion from the 2024 budget for the recapitalisation of the state banks, including BOC and the Poples Bank.  

However, this recapitalisation will mainly benefit business owners with insolvent enterprises instigating a risk under prevailing banking practices. 

The higher capital levels of banks will enable it to avoid declaring bankruptcy of insolvent companies and instead, renegotiate and/or extend the terms of their loans. Banking and Financial Services recent report observed.   

According to state bank rescue plan, measures will be taken to sell 20 percent stake in state banks to strategic investors or the public, a senior official of the finance ministry disclosed. 

It will support the future growth of the two state-owned banks to reduce the burden on taxpayers’ funds,” he said.

The treasury has also set apart funds to cover US$ 510 million from the total US$ 1.2 billion debt that the airline owed to banks and other institutions, he added. .

Ir has taken over debt worth Rs. 100 billion of SriLankan Airlines sparing the US $ 175 million five year international bond.

The national carrier’s liabilities included $ 105 million of Treasury guaranteed debt due to Bank of Ceylon, $ 12.9 billion of Treasury guaranteed debt due to Bank of Ceylon, $ 105 million of Treasury guaranteed debt due to People’s Bank and Rs. 18.5 billion of Treasury guaranteed debt due to People’s BankAs part of the actions agreed under the IMF-EFF arrangement, the outstanding foreign currency debt of Rs. 884.1 billion of the Ceylon Petroleum Corporation (US $ 2,434.8 million) was absorbed into central government debt by end 2022

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