Should The State Banks Continue Outside The Purview Of The Ministry Of Finance

By Rusiripala Tennakoon –JUNE 18, 2017

Rusiripala Tennakoon

The controversial divorcing  of the CBSL from the duties and functions falling within the Ministry Of Finance and transferring it to a new Ministry under the Prime Minister has become a hot subject of discussion. Both Legally and Operationally the CBSL remained as an institution directly linked to the MOF since its inception. Due to the haphazard and makeshift provisions during the 100 day government (which was generally accepted as a transitional  period), several ministerial portfolios underwent drastic changes in a rather unorthodox manner with regard to the distribution of  duties and  functions . The country has already witnessed the  consequences of this step during the Central Bank Bond Scam. State Owned Banks which remained attached to the MOF were also allocated to a new ministry outside the MOF. This state of affairs continued without a change even after the formation of the coalition government ((claimed to be a national government ) following the General Election in August 2016. However, from what transpired at the Ministry it is now confirmed  that the government has had reasons for downsizing the MOF before the Ministry was assigned to the former minister. He was finally removed.

In the context of the recent cabinet  reshuffle it is pertinent to review the current status of the State Owned Banks and to consider whether it is prudent to continue these outside the purview of the MOF any- more. Generally the entire banking industry has to function with a  very close relationship with the MOF. Credit supply to the local economy, accessibility to state guaranteed funds and the openings they have to several credit lines and income subsidies, are factors that indicate that the state banks should be positioned  to liaise directly with the MOF. In fact they will have to participate in most of the budget related plans and development activities. Financing of infra- structure projects could be best undertaken or handled by the State Banks at relatively lower costs. We are aware that a significant component of project costs comprise of the  interest element. Even if a higher interest is charged such income will eventually flow back to the treasury when the projects are financed by the state banks. All these point to the fact that they would be better positioned functionally under the MOF than being under another ministry.

The funds and the capital of the State Owned Banks are provided by the treasury. We are aware of several instances of  state intervention to bailout the banks when they were confronted with capital and liquidity problems. In 1992 the then minister of finance stated in the parliament that the two State Banks , Bank of Ceylon and Peoples Bank were insolvent. In more simpler terms they were declared bankrupt. Following a big commotion the government of the day  decided to recapitalize the two banks with state funds instead of the alternative then proposed to privatize the banks. Events such as this confirm  the need for the banks to be under the control of the treasury rather than some other ministry. When we look at the operations of the two state banks in retrospect we observe that they are constrained due to binding statutory provisions in acquiring the capital adequacy requirements. They cannot issue shares or raise capital by debenture issues as freely as the private banks. As the fund requirements of the state banks could only be fulfilled by the treasury and such financial involvements are of a very high range the treasury intervention becomes  compulsory. Furthermore when the state banks need additional capital infusions a financial evaluation has to precede any  new allocation of funds. The treasury and the MOF necessarily  have  to do this task. The Bank of Ceylon by virtue of the Act of incorporation  has the right to raise debentures while the Peoples Bank Act has no such provisions. Such issues are  best decided at the treasury level and this could be achieved by having the State Banks under the MOF.

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