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State Banking reforms gain momentum but may face delays in official bungling

By: Staff Writer

June 06, Colombo (LNW): Sri Lanka two state-owned banks are set to achieve tangible progress in shifting towards more commercially-driven business models and capital adequacy strengthening governance, finance ministry announced.

But the state-owned banks will take some time to implement a business-model changing  from directed lending and to develop commercial operations.

These banks are still working on their business-model transformation, and remain significantly reliant on corporate lending, despite efforts to diversify.

Asset quality will remain key to intrinsic creditworthiness in the near term. State-owned banks are most vulnerable given their participation in higher-risk subsidised development lending

These local banks are needed Rs. 1.4 trillion capital injection after bad loans increased alarmingly alarming proportions in economic crisis and debt moratoriums as well as debt restructuring hit their balance sheets, it stated.

Bank of Ceylon, HDFC Bank, National Savings Bank, Pradeshiya Sanwardena Bank, Peoples Bank and Regional Development bank are included in the SOE restructuring unit’s list of 31 state owned enterprises (SOEs).

With the IMF technical support and new funding, the central bank and the government will be better placed to grant capital injections if required to stronger banks’

Under IMF guidelines, weaker banks are likely to be merged into the stronger banks while: restructure of struggling state-owned banks is also considered as a possible option.

In order to protect retail investors from potential losses, the Government will not seek to sell shares to retail investors in either of the banks (Bank of Ceylon/People’s Bank) until the bank has been profitable and in full compliance with all Central Bank prudential ratios for not less than two consecutive calendar years following the date of the cabinet decision, finance ministry emphasised.

 In any event, the Government would only consider selling a minority stake in selected State banks, whilst the Government retains the majority share ownership, as articulated in the 2024 budget speech (paragraph 70) the finance ministry confirmed. .

The Ministry of Finance will be establishing a specialised unit under the Public Enterprises Department entrusted with responsibility for managing the state’s shareholdings in SOBs and to monitor and report on their performance.

The Auditor General has been directed to appoint qualified external auditors for all SOBs, and will enter into a Memorandum of Understanding to establish this unit as standard practice going forward.

With the consent of the Auditor General, all SOBs shall select new external auditors for the year beginning 1 January 2025 from amongst the auditing firms with substantial international footprint.

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