CBSL restrictions imposed on LCBs

As the regulator, the CBSL will have to be mindful of possible capital shortfalls induced or taking place due to the prevailing situation

Effective 1 July 2021, Licensed Commercial Banks and Licensed Specialised Banks operating in Sri Lanka are required to be guided by the restrictions imposed on them till 31 December 2021, by the Central Bank. 

These restrictions appear to be short-term measures taken by the CBSL, mainly to address the Foreign Exchange Reserve quandary currently before the country overriding all other financial problems. They are applicable to all Licensed Commercial Banks including those incorporated outside Sri Lanka, which in effect brings all foreign-owned commercial banks too under the stipulations. 

These restrictions infer an implied further adverse effects in relation to the bank performance due to the impact of the COVID-19 outbreak, compared to the key indicators of the previous years. The financial statements for 2021 are still awaiting the finalisation of the external audit requirements and according to the restriction imposed the foreign commercial banks operating here will not be permitted to repatriate any of their declared profits already made. CBSL envisages according to its own estimates the LCBs to experience impediments in the growth of assets and business expansion areas due to the shocks from the pandemic-affected business environment. 

These considerations are neither irrelevant nor unjustified in the context of the unpredictability and uncertainties devolving round the pandemic situation continuing unabated in a global sense. In fact, it appears to be a much more realistic approach and a sensible response to a situation in contrast to mawkish political conservatism we witness. In a practical perception, the restrictions imposed, sound more logical preventive actions which when applied commonly across the industry would not cause any particular disadvantage to any single bank. 

As the regulator, the CBSL will have to be mindful of possible capital shortfalls induced or taking place due to the prevailing situation. The country is experiencing a keen concern about the need to maintain a sound and strong banking industry with guaranteed liquidity and capital adequacies. They will be more helpful to the local banks both in the State and Private sector. The conditions they are expected to adhere to are in keeping with the directive issued earlier by the President to the SOEs with a view to stop wastage and improve efficiency.

When we look at the restrictions now imposed by the CBSL it appears that they have identified the possible problem areas more specifically, maybe under the scope of their responsibility of the supervisory role and the regulatory framework of promoting corporate governance and capital requirements of the banking industry. 

The private sector banks with public quoted shares are required to refrain from buying back their own shares. We have noticed some ‘unsavoury movements’ in our share market operations recently. The CBSL has stepped in, it looks like to curtail any contributory actions on the part of the LCBs in this regard. 

The restrictions also extend to the curtailment of increasing the management allowances and payments to Board of Directors. CBSL has restricted this area probably with their past experience and also presuming that there is a possibility of a tendency to resort to such practices even under troubled circumstances. But it could have been more effective if the CBSL brought in this restriction to cover any and all enhancements and increases of all sorts, possible under their rights of normal operations. 

Perhaps the CBSL may not be aware of the highly extravagant special allowances and perks that have been granted to the top executives of the banks particularly in the State sector. Some of these were even highlighted in the recent Parliamentary COPE inquiries causing alarm even among the not so caring legislators making them raise their eyebrows.  

Banks have been directed to exercise prudence and refrain as far as possible from incurring non-essential expenditure. The restrictions specify certain areas such as advertising, business promotions, gift schemes, entertainment, sponsorships and travelling, etc. A careful examination will show that most of these expenditure items serve a different purpose than the needs superficially canvassed in their favour. 

It is noteworthy that the President’s directive given earlier to the SOEs to stop wasteful expenditure also covered these areas. But what we observed was that without the intervention and overlooking by a supervisory and regulatory authority the directives did not have the desired effect. Now in the context of the CBSL effectively monitoring the adherence to these restrictions they have enforced we can expect some improvement.

In the State sector, as was revealed in the recent COPE inquiries, there have been many deceptive avenues to side track compliances including procurements. There had been instances where subsidiaries owned by State banks were used as agencies to engage in high value contracts involving constructions and supplies to bypass the procurement procedures. Therefore, the CBSL will have to focus on such matters to give effect to what they have enunciated.

If the CBSL is keen in ensuring a safe liquidity position in the banks with adequate capital they have to keep a close watch on their accounting practices. Under various stratagem banks can resort to mislead even the auditors by adopting controversial gimmicks. This is commonly seen in the loan loss provisioning and other areas where even the audit eye has failed to detect. Banks have callously disregarded some of the obligations they have in making loan loss provisions as well as other general provisions falling within their fiduciary responsibilities. 

Just to quote an example we can point out the case of inadequate provisions made by the two State banks in the late ’90s first detected by the international audit firms leading to a highly contentious issue of calling the two banks insolvent. The major laxity was in the provisions that the banks were required to make in respect of Employee Retirement Benefit payments. It may be of interest to the regulator to know that the position today is much worse than it was when the highlighted revelations were made then. 

With regard to the loan loss provisions too, the situation that prevails in some banks is not conducive to a position of maintaining a sound liquidity in keeping with the supervisory requirements of the regulator. Several advances continue to be kept in the current category although they remain qualified over a long period to be transferred as non-performing advances.

We are also hearing about public criticisms levelled against these institutions alleging fraudulent lending operations and loans of large amounts figuring as non-performing, some of those earmarked, to be written off under the sophisticated hair cut exercises. A number of advances to be treated in this manner happen to be facilities granted in foreign exchange for overseas projects. The irony of the matter is there is no one who can be held responsible for the poor risk assessment standards applied at the time of granting these facilities. 

The foreign-owned banks should be kept under surveillance of the CBSL like all other banking institutions. There are many instances of regulatory violations including huge tax evasions in this sector. We are also aware of certain questionable cultures introduced by some foreign banks., for example, the infamous oil hedging deal which cost a huge sum in foreign exchange to our country. 

Any repatriation of profits or foreign exchange in the form of capital withdrawals should be carefully monitored by our regulatory authorities. Hence the imposition of restrictions in this manner is a timely and a much-needed precautionary action taken by the CBSL.