BANKING >>>

- State giants restructure to compete -

Private banks are essential to expand the financial sector, but the dominant state institutions still have a role to play

Dominated by two state institutions, the banking community is making money, but a shake-up seems inevitable if Sri Lanka's financial sector is to expand. Several recent events have demonstrated the financial institutions' willing-ness to encourage greater participation in the sector. The Colombo Stock Exchange (CSE), for example, has introduced less stringent listing rules in a bid to lure more local companies and lift the tiny bourse's capitalisation.

Market capitalisation was expected to double last year with the sale of the government's stake in Sri Lanka Telecom, but that was postponed because of escalation in the country's ethnic unrest. In fact, total market capitalisation dropped over the year. CSE chairman Ajit Gunewardene believes privatisation is not the only way of increasing market capitalisation. "We are looking at private companies to pave the way," he says. The new chairman of the state-run Bank of Ceylon (BoC), Ken Balendra, has declined to comment on the bank's current restructuring programme, although the previous incumbent insisted it was not a prelude to privatisation. BoC and the state-owned People's Bank between them hold a 55 per cent share of the market. The 40-year-old People's Bank has the larger branch network of the two, while BoC holds more assets. People's Bank chairman Mano Tittawella says private banks have taken a share of the state banks' market, but adds: "The state banks also play a development role in this country. "They give loans to low-income earners. A large proportion of our clients is in the lower income groups, such as farmers and peasants. "Private banks are not interested in these people. Therefore there is a severe banking need, so the state banks do have a certain responsibility. As long as state banks continue to play this role and there is no other agency to carry out that task, then there is no way the state banks can be privatised." The downside of the People's Bank's position is that it has a large non-performing loan portfolio. "This problem was solved by the Bank of Ceylon about three years ago with internal restructuring," says Mr Tittawella. "The People's Bank is in no state to be privatised and if you put it up for sale tomorrow there wouldn't be any buyer for it. "World Bank-style privatisation has been ruled out for both the state banks and I certainly don't see it happening in the next decade. We are working on a business plan that over five years will make the bank a very viable commercial proposition, but owned by the government."

Justin Meegoda, president of Vanik Incorporation, a merchant bank established in 1993, says many banks dependent on the capital market have taken a "real beating" in the past four years. Vanik has called for a moratorium on its debt repayments from its creditor banks to help turn round its business. "We are asking financial institutions for a one-year moratorium on debt so we can use internal funds for recovery," says Mr Meegoda. Vanik has sold most of its non-financial businesses, such as tea plantations, to overcome a cash shortage and cut mounting losses. Mr Meegoda says Vanik has cut its liabilities by two billion rupees (£16.5 million), but still carries debts of 3.4 billion rupees (£28.2 million) that were backed by assets. Vanik's debentures are equally guaranteed by the United States Agency for International Development and the People's Bank. Ultimately some of Sri Lanka's smaller banks will have to merge in order to survive, he says. Vanik bought a minority stake in two banks "so that we can go into some kind of strategic alliance," adds Mr Meegoda.