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‘Consolidate,
or go unnoticed’
Expert
says the only way for local banks to make a name in the international
arena is by getting rid of the single owner clause
United
Motors Lanka PLC Chairman and veteran banker Ranjith Fernando
began his career with People’s Bank in 1962, before moving
into development banking with DFCC. He subsequently joined
NDB Bank, and after working there for over a decade became
CEO, and retired in 2001. He was then appointed Secretary
to the Industry Ministry in early 2002 Following
are excerpts:
Q:
What are the main changes that you would like to
see in the banking sector?
A: Local banks need to consolidate more. In the international
world of banking, size matters and unless the smaller banks
in Sri Lanka merge and consolidate, their presence in the
global market will never be felt. Unfortunately, the regulatory
regime of our country does not facilitate such mergers. The
single owner restriction clause must be removed, if smaller
banks are to merge with others or large banks are to acquire
a controlling stake. If the single owner clause is in place
to ensure that one person does not have arbitrary power over
that organisation then what is the justification for having
state banks? If private owners take over a private bank then
they can have around 10% or more of shares, but he is controlled
by other shareholders, whereas the state banks are entirely
controlled by the government. It is the government that appoints
the board and most of the other key positions within the bank.
If 30% of a bank is taken over, for example by NDB, which
is in turn owned by 10,000 shareholders, then the whole theory
of ‘single owner’ becomes hollow.
Q: What are the main
advantages that you see in mergers?
A: There is no other way that banks can consolidate
accounts. Rules must not be applied or followed blindly. There
can be situations where single ownership can cause issues,
I am not denying that but banks cannot grow in strength unless
they consolidate. When it comes to having larger reserves
and accounts, making bigger investments and possessing capital
consolidation is essential. Moreover, our banks would be able
to make a far more noticeable presence internationally, if
they were larger.
Q: Do you feel that the
credit crunch in America and threats of global recession will
have an impact locally?
A: I do not agree with thoughts that our economy is
too small to be affected. There will be an impact. Just because
we are small does not mean that we are immune. Despite the
fact that there will be no direct exposure, we have many lessons
to learn from this unprecedented global scenario. There is
a deep governance issue that must be seriously considered.
Lehman Brothers had a debt equity ratio of 1.32, which was
untenable even for a large organisation like them. Mortgage
loans were issued by smaller banks without equity; their tag
line was ‘No Questions, No Papers,’ and they were
then put into one basket and re-issued as derivative loans
to international banks with the blessings of Rating Agencies.
It must be understood that at some point, someone will have
to pay the price for such excesses. Each organisation must
be aware of its appetite for risk and do business accordingly.
No one can live beyond their means.
Q: Is Sri Lanka living
beyond her means?
A: Yes. This country is a clear example of living beyond
its means. We continue to give subsidies while fighting wars
and maintaining a massive public sector. We are mortgaging
the future of our country. Soon there will be a day of reckoning
because we cannot continue to live on loans and with bad monetary
management. A country can be easily compared to a company.
A company will have shareholders who appoint the board, who
in turn appoints the management to run the company. In a country
context, the shareholders are the people, who appoint the
government that is the board and as in every company, that
board must be held accountable to the shareholders. This does
not happen in Sri Lanka. Ideally, the CEO of a company presents
its performance in line with the business plan against the
budget on a monthly basis. There must be day-to-day accountability
on planning and spending. The Fiscal Responsibility Act that
was passed by a former government is now a dead letter.
Q: What is the main government
institution that should be held accountable?
A: The Central Bank. Curbing inflation is the main
role of the Central Bank. But we have been having double digit
inflation for the past few years. In other countries such
as New Zealand, the Central Bank Governor must resign if he
cannot keep inflation within projected limits. Inflation hits
hardest on the salaried man. It makes the poor poorer and
that is clearly seen. In addition, the artificially controlled
exchange rates have relegated exporters to reduce their rupee
profits. Earlier, because of depreciation, at least the exporters
could accumulate more profits to fund their businesses locally.
Exports have become uncompetitive today. Budgeting is done
on politics and not sound economic principles.
Q: As a former Secretary
to the Industries Ministry what are your comments about the
industry?
A: We have a pathetic industry situation. Worthwhile
industry is only carried out by the private sector, but the
policies regarding them are decided on by the government.
If you take any industry from rubber to apparel, policy decisions
are made by the government and the real private sector people
are absent.
Q: What were the main
initiatives implemented during your tenure?
A: This was one of the main reasons why I established
clusters of industries. Up until that point the policies were
all made by unprofessional government bodies. This initiative
was later taken up by the Finance Ministry and continued.
Both small and big companies were allocated space within the
association and they met every month to discuss industry specific
issues. It was the apparel cluster that initially launched
plans to deal with the end of the quota system. We were the
ones who took the initiative, but the private sector told
us what to do. We need the same system to continue and not
have political party hangers on be considered as private sector
representatives. If the public sector is instructed properly,
they will respond well. The ministries are filled with capable
people; it is just that they are not given the right direction.
Q: How can the industry
sector be improved?
A: The industry sector is very dynamic. Our entrepreneurial
capacity is good. But we need assistance in being more competitive
and innovative. They used to come and ask our ministry for
protection, because they prefer to serve the local market.
This means that a tariff must be imposed on the imported items.
However, we made it clear that we would only impose such tariffs
for a limited amount of time. If a 50% tariff is imposed on
the first year, then it must be reduced to 35% the next year
and so on. It is the manufacturers’ duty to make sure
that his product increases in standard and can battle with
the imported equivalent. Otherwise, we would be forcing the
consumer to buy a substandard product and that would be unfair.
We need to help them become viable. But it is like us agreeing
not to bring down cricket teams from South Africa and Australia
because we are afraid our team will lose and only bringing
down Canada, Bangladesh and Kenya to make sure that we will
win. How can there be room to grow, if there is no competition?
Local businesses must understand this and gear themselves
to battle in an international arena. They cannot expect the
government to protect them forever.
Q: You earlier criticised
subsidies, but how can the agriculture industry survive amid
global price escalation, if they are removed?
A: We must help our industries go international. Exports
must have value addition and not send goods as raw materials.
Currently, around 60%-70% of rubber is exported after being
processed. Sri Lanka is a global leader in pneumatic tyres,
which just goes to show what we are capable of. We must help
these companies import technology. Agriculture is subsidised
in most countries and with good reason. But, the sector must
expand into commercial agriculture. Even if we end up having
to import our staple products we must make sure that agriculture
is economically viable and is infused with sound economic
practices that will benefit the larger economy.
Q: What are your opinions
of the banking industry as a whole?
A: The dominance of two state owned banks encompassing
the bulk of the market share is unhealthy. There has been
a significant drop in saving. In fact, we have a negative
saving interest. Inflation has resulted in us having one of
the lowest savings rates in South Asia Association for Regional
Cooperation (SAARC) when compared with Gross Domestic Production
(GDP): In India it is around 50% and even in smaller, less
economically prosperous countries such as Bhutan, the ratio
is similarly high. In contrast, ours is around 20%-30%. Of
course the banking industry cannot correct that. Unless inflation
drops to a single digit figure, savings will remain low. People
are looking at alternatives such as land, which has caused
real estate prices to shoot up, but most people have no money
to invest because it is spent in the day-to-day activities
of living. Today, per capita expenditure is lopsided to an
incredible level. Every person in Sri Lanka pays Rs. 8,736
for defence, but only Rs. 2,974 for health and another Rs.
2,359 for education. This is an absurd situation. At least
if the war ends, the expenditure can be justified, and I believe
that is the only reason people are enduring inflation rates
and other macro-economic problems.
Q: You joined People’s
Bank the same year it started. However, it has fared badly
in the recent years. How can it be resurrected?
A: The government should be brought into the minority.
A new board must be appointed that will have the power to
act independently and will not have to be under obligation
to provide the government with cash, whenever it demands.
It is essential that the bank be allowed to run without political
interference. It was the first bank to take banking to villages
and still commands considerable resources including a recognisable
brand name. Nonetheless, outside expertise will refuse to
get involved unless it is given a free hand.
Q: As the Chairman of
a vehicle imports company, how do you view the excessive taxing
of the government?
A: Taxation is killing entrepreneurs in Sri Lanka.
Taxing is prohibitive and people become discouraged because
of the extremely high taxes that cannot be justified. Banks
have to pay around 60% of their profits as taxes and when
they do not see the public sector making use of the money
that they have worked extremely hard to earn, one cannot blame
them for being disheartened. What I cannot understand is why
the government does not consider the simple fact that, if
they keep taxes at a reasonable level, they will get more
profits. If people are given the chance to import more cars,
then the benefit is for the government too.
Q: The Small and Medium
Enterprises (SMEs) have died a gradual death over the past
few years. How can the government help?
A: They must be given technical assistance, sector
by sector. There must be political will to implement strategies,
not just mollycoddling, but help actively. They need to meet
competitive marketing standards, understand the importance
of innovation and have access to larger investment. I have
a strong feeling that the SME Bank will suffer the same fate
as the Lankaputra Bank, because it is politically driven with
no professional motivation. Assistance for the small people
can only come from the private sector.
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