Downgrading of banks by Fitch

Wednesday, 29 June 2016 00:00 - - {{hitsCtrl.values.hits}}

The Daily FT of 24 June carried the alarming news that the ratings of both our development banks, National Development Bank and DFCC, have been downgraded by the respected Fitch Ratings.

For investors and other stakeholders that include various Government agencies, this is very bad news. Apart from private investors, the people of this country (Government investments, pension funds) have invested heavily in these two banks. As both these banks were created by acts of Parliament and the continued heavy Government involvement, most people had confidence in them as stable institutions.

But for the last three years or so both banks have been on the decline. Even stable and robust institutions can turn negative when you have people who are not well suited at the top. These banks need men with high moral standing; intelligent and innovative men.

The NDB’s decline started during the Rajapakse regime. I am made to understand that the main problem at NDB is that a person or persons who are known as commercial deal making bankers were imported from private banks to these two development banks. Their motive is not the broad development of the country but to show quick profits even by manipulating the books. Even taking commissions and profiting personally on bank business is accepted as okay by some bankers. They even brought the bank into disrepute by getting involved in politics and helped certain candidates in many ways during recent elections.

For an example of the decay at NDB, take the Thimbirigasyaya Branch of the bank. Previously this branch had an open office concept and had staff and managers moving freely with the customers, helping them even by filling various forms. The manager who came in with the new change was more like the bank managers of the 1960s; she build a tinted cubicle for the manager and never meets the customers unless by appointment. In fact, the branch will not serve even a NDB customer from another branch, a service all banks now provide! Unless your accounts exceed Rs. 5 million you are encouraged to leave the bank.

DFCC had Nihal Fonseka for a long time as CEO. He also had commercial bank background (HSBC which was in the news last week with allegations of some managers cooking the books to qualify for bigger bonuses) but had PR and social skills which went a long way. Although there was no notable development at DFCC, he held the ship steady.

This was a time when all banks did well and you did not have to be extra smart to show good results. But as happens when he left, it seems Fonseka managed to manoeuvre into his position a relative and clansman. The new CEO is by all accounts extremely risk-averse (as he is not at all confident) and the result is nothing is happening at the DFCC. But the new CEO has brought back Fonseka as a consultant to the bank on a very lucrative package.

Then take SANASA Development Bank, our co-operative bank, which did well for a while. But here again when Chairman Kiriwandeniya stepped down, his daughter was brought into his chair. The result is that the bank has lost credibility and is going down steadily. Kiriwandeniya is still pulling the strings so the bank really is family run.

There must be clear criteria in appointing high officials to banks and in no circumstance should friends and relatives of incumbents be allowed to take over.

Feroze Khan