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With the tourism industry directly contributing c.4.5% of the Country’s GDP and with a further indirect contribution by the supply chain linked to the tourism industry, a systemic threat to the stability and sustainability of the financial system was eminent due to a wholesale default of credit facilities by the industry – Pic by Shehan Gunasekara
By Ifthikar Abdul Wahid
The Easter Sunday event had a catastrophic impact on the tourism industry in Sri Lanka, with many businesses and individuals highly exposed to the industry facing severe hardship by way of a significant impact on revenues resulting in a cashflow crisis. This cashflow crisis has contributed to the inability of these businesses and individuals servicing credit facilities afforded by Licensed Commercial Banks, Licensed Specialised Banks and Non-Banking Financial Institutions (NBFIs), together referred to herein as (FIs).
The Ministry of Finance through the banking regulator the Central Bank of Sri Lanka (CBSL) together with the Sri Lanka Tourism Development Authority (SLTDA) immediately stepped in to mitigate any potential systemic risk to the financial system due to a wholesale default of credit facilities obtained by these affected businesses and individuals.
With the tourism industry directly contributing c.4.5% of the Country’s GDP and with a further indirect contribution by the supply chain linked to the tourism industry, a systemic threat to the stability and sustainability of the financial system was eminent due to a wholesale default of credit facilities by the industry. Credit directly linked to the tourism sector is estimated at c.4% of total private credit and in rupee terms c. Rs. 230 billion, with a further significant sum availed by those indirectly linked to the tourism sector. Due to this significant exposure a complete systemic breakdown of the industry was eminent and the cascading effect of such a breakdown on the banking system would have been catastrophic.
The Monetary Law Act (as amended) through section 5 of the said act has entrusted the responsibility of maintaining financial system stability to the CBSL. One of the tools the CBSL uses to discharge this responsibility is, by enforcing regulation through the Banking Act No. 30 of 1988 (as amended) and the Finance Business Act No. 42 of 2011 (as amended), by regulating the functioning of licensed financial institutions.
The mitigant to prevent a threat to financial system stability
The modus operandi adopted by the CBSL in this instant to mitigate the potential threat to financial system stability was to issue directions/circulars to respective financial institutions under and in terms of statutes governing the functioning and regulation of financial institutions, directing the financial institutions to grant concessions specified in the directions to individuals and businesses registered or to be registered with the SLTDA.
The concession
The banking sector
The banking sector is governed and regulated by the Banking Act No. 30 of 1988 (as amended) and section 46(1) of the said Banking Act which reads:
“46 (1) In order to ensure the soundness of the banking system, the Monetary Board may issue directions to licensed commercial banks or for reasons to be stated in writing to any one or more of them regarding the manner in which any aspect of the business of such bank or banks is to be conducted and without prejudice to the foregoing, may, also issue directions specifying….”,
provides the CBSL the required tool to implement a program to mitigate any potential systemic threat to the financial system.
Under and in terms of the said provision of law the CBSL on 8th May 2019 issued circular bearing No. 07/2019 read with Explanatory Note 1 dated 16th May 2019 and Explanatory Note 2 dated 20th June 2019 (together referred to herein as the (“CBSL Banking Circular”).
The direction given to licensed banks through this circular is as follows:
“Concessions granted to the tourism industry
In view of the adverse impact on tourism industry due to the current situation of the country, licensed commercial banks and licensed specialised banks, hereinafter referred to as licensed banks, are requested to grant the following concessions to those individuals and entities in the tourism industry, who wish to avail such concessions.
i.Licensed banks may grant a moratorium to individuals and entities who have registered with Sri Lanka Tourism Development Authority or any other authority/agency to provide services to tourism, on a case-by-case basis.
One is forced to pose the question: Are the irrational and arbitrary acts of FIs in granting concessions as directed by CBSL a violation of Article 12 of the Constitution; specifically Article 12(1), which guarantees equal treatment and equal protection of the law? Based on contracting agreements related to credit facilities offered by FIs being private contracts with no state role, one may dismiss this assertion! A closer look at the underlying principles behind the grant of the concession together with precedent case law does provide a strong case in support of a violation of article 12(1) of the Constitution
ii.The moratorium shall be granted for performing loans (both capital and interest) till 31 March 2020, in respect of outstanding credit facilities as at 18 April 2019.
iii.The Board of Directors of the licensed bank or any other authority delegated by the Board of Directors shall approve the granting of moratorium.
iv.Licensed banks shall convert the capital and interest falling due during the moratorium period into a term loan which shall be recovered from July 2020 onwards. A concessionary rate of interest may be charged for this facility.
v.The licensed bank and the borrower shall agree on the repayment period and the rate of interest on the above loans.
vi.Licensed banks may maintain non-performing loans in the same category for classification and provisioning purpose, during the moratorium period.
vii.Licensed banks shall waive off the penal interest to be charged on non¬performing loans, during the moratorium period.
viii.Licensed banks shall use the funds in Enterprise Sri Lanka Loan Scheme (Jaya Isuru) and Sawbagya Loan Scheme of the Central Bank of Sri Lanka to grant working capital facilities, if necessary, after taking into account the moratorium granted for capital and interest dues.
ix.Licensed Banks shall maintain necessary documents to substantiate the granting of such concessions.
x.Licensed Banks shall report the moratorium availed by borrowers as per the format in Annex I, to the Director of Bank Supervision on a monthly basisby 15th of the succeeding month.”
The Non-Banking Financial sector
The licensed NBFI sector is governed by the Finance Business Act No. 42 of 2011 (as amended), and section 12(1) of the said Act reads:
“12. (1) Notwithstanding the provisions of any other law, the Board may give directions to finance companies or to any group or category of finance companies regarding the manner in which any aspect of the business and corporate affairs of such finance companies are to be conducted and, in particular -……..”,
provides the CBSL the required tool to implement a program to mitigate any potential systemic threat to the financial system.
A circular providing directions dated 19 May 2019 bearing No. 01 of 2019 under and in terms of the above provision of law similar in nature to the CBSL Banking Circular was issued to NBFIs, except that the grant of working capital loan facility utilising Enterprise Sri Lanka funds specified in paragraph (viii) of the banking circular was restricted to licensed commercial banks only.
The CBSL through the issue of the two directions (together referred to herein as “CBSL Circular”) described herein fulfilled its statutory obligation with respect to putting in place a viable mitigant to prevent any eminent threat to financial system stability.
Did the financial institutions fulfil their statutory responsibilities?
Despite the statutory directions issued by the CBSL, licensed financial institutions both banks and NBFIs have to-date attempted to stymie this CBSL direction with irrational and arbitrary excuses and selectively nominated who is entitled to receive the concession, with favoured customers getting a preference over others.
Are the financial institutions violating the law?
Based on the questionable behaviour of financial institutions in operating irrationally and arbitrarily in giving effect to CBSL directions, one is forced to question if the FIs are acting contrary to and in violation of the laws of the land?
Equal protection guaranteed by the Constitution
One is forced to pose the question: Are the irrational and arbitrary acts of FIs in granting concessions as directed by CBSL a violation of Article 12 of the Constitution; specifically Article 12(1), which guarantees equal treatment and equal protection of the law?
Based on contracting agreements related to credit facilities offered by FIs being private contracts with no state role, one may dismiss this assertion! A closer look at the underlying principles behind the grant of the concession together with precedent case law does provide a strong case in support of a violation of article 12(1) of the Constitution due to the following reasons;
The decision to grant concessions through FIs to affected persons is neither covered in any bilateral facility agreement between the FIs and customers nor a decision initiated by the respective Boards of FIs. The decision to grant concessions are the result of an Executive and/or Administrative decision of the State through statutory provisions in law, which included a demand to Board of Directors and or any other approving authority to mandatorily approve the CBSL direction (paragraph (iii) of CBSL Banking Circular).
In the said circumstances, the FIs in giving effect to the Executive/Administrative decision of the State could be construed as “instrumentalities of the State” exercising Governmental functions as explained by Justice Sharvananda in Perera Vs Insurance Corporation (1978-79-80 1 SLR 128 at 137-138).
The reasons for highlighting and publishing the economic rationale and legal principles governing the grant of the concessions is because certain FIs are shirking their statutory responsibilities and granting the concessions granted by statutory order only to favoured customers in an irrational and arbitrary manner. Their irrational and arbitrary action includes disbursement of funds under the Enterprise Sri Lanka program, which are required to be granted under and in terms of paragraph (viii) of the CBSL circular. In the said circumstances it is very important the public at large is aware of their rights under the laws of the land
The purpose behind the State granting this concession through Executive/Administrative action, was with view to an important statutory public function in preventing a potential breakdown of the financial system, an event which would have resulted in a threat to national interest. The FIs on being construed to be “instrumentalities of the State” giving effect to an Executive/Administrative decision to protect national interest would be bound by Article 12(1) of the Constitution, and any exercise of discretion in discharging this public function cannot be irrational, arbitrary or unfettered.
The directions to FIs in paragraph (i) of CBSL Circular states:
“Licensed Banks may grant a moratorium to individuals and entities who have registered with SLTDA or any other authority/agency to provide a service on a case by case basis”.
The two operative functions in the said first paragraph of the direction “may grant” and “on a case by case basis” imposes on FIs discretionary power. The explanatory note provides a qualification on the recipients of the concession being those registered with SLTDA or to be registered with SLTDA, but is silent on a criteria for the FIs to use to select recipients “on a case by case basis”.
The direction in Paragraph (ii) in the said CBSL circular is very clear and unambiguous, whereat it is stated:
“The moratorium shall be granted for performing loans (both capital and interest) till 31 March 2020, in respect of outstanding credit facilities as at 18 April 2019.”
The main operative function of the direction in paragraph (ii) is “shall be granted for performing loans”. Previous CBSL directives to FIs have clearly defined all credit accommodations (facilities) under two categories being “Performing Loans” and “Non-Performing Loans”. Based on direction in paragraph (ii) of the CBSL circular the concession is restricted to “Performing Loans”.
All other directions numbered paragraph (iii) to paragraph (x), excepting paragraph (vi), are unambiguous mandatory directions to FIs to comply with and no discretion is permitted. Paragraph (vi) applies to “Non-Performing Loans” and the banks are permitted to exercise discretion.
A read of paragraph (i) with paragraph (ii) and other mandatory compliance paragraphs in the CBSL circular, clearly implies, the criteria to be used in exercising discretion to select recipients “on a case by case basis” is the evaluation of the credit facilities to confirm if they are “Performing Loans” or “Non-Performing Loans” and no other criteria based on the whims and fancies of the FIs concerned.
FIs, as an “instrumentality of the State”, using any criteria other than assessing whether the facilities are “Performing Loans” or “Non-Performing Loans” as defined by the CBSL, and denying a potential customer of the concessions granted by statutory order could be construed to have violated that customer’s constitutional right to equal treatment guaranteed under article 12(1) of the Constitution.
Furthermore based on the CBSL Circular, it is a bounden duty of every FI to inform every affected person associated with the tourist industry, the availability of the concession granted by the government of Sri Lanka, the option of opting for the concession or not is the right of the customer and selecting who is entitled to the concession based of an FIs own criteria is definitely not the right of a FI.
In the event such actions of FIs is construed as a violation of a affected customer’s fundamental right, such a customer of any FI who has been unfairly treated by a FI, could seek the intervention of the Human Rights Commission or could pursue with a fundamental rights application in the Supreme Court to seek redress.
Criminal liability for non-compliance of direction
As the CBSL has issued directions by way of a circular, to licensed banks under section 46(1) of the Banking Act No. 30 of 1988 (as amended) and to NBFIs under section 12(1) of the Finance Business Act No. 42 of 2011 (as amended), any non-compliance by FIs of the said directions is a criminal offence under the respective statutes and criminal proceedings against a non-complying FI can be commenced in the Magistrate’s Court and on being found guilty, a FI is liable to be penalised as per provisions in the Banking Act No. 30 of 1988 (as amended) and the Finance Business Act No. 42 of 2011 (as amended) respectively.
In the event the State fails to commence proceedings, any affected party is at liberty to make a complaint under section 136(1) of the Code of Criminal Procedures Act No. 15 of 1979 (as amended), through a private plaint to the Magistrate under whose jurisdiction the crime has been committed to inquire and initiate proceedings against a FI who has not complied with the CBSL direction.
The reasons for highlighting and publishing the economic rationale and legal principles governing the grant of the concessions is because certain FIs are shirking their statutory responsibilities and granting the concessions granted
by statutory order only to favoured
customers in an irrational and ar
bitrary manner.
Their irrational and arbitrary action includes disbursement of funds under the Enterprise Sri Lanka program, which are required to be granted under and in terms of paragraph (viii) of the CBSL circular. In the said circumstances it is very important the public at large is aware of their rights under the laws of the land.
(The writer can be reached via [email protected].)
