Secret of fat profits in local banks!

Are banks exploiting the gullible, ignorant and illiterate fellow Sri Lankans?

(This article is based on written
submissions made by the writer to
President Mahinda, The Monetary Board of Sri Lanka, The Financial Ombudsman of Sri Lanka, Consumer Affairs Authority, Sri Lanka and Secretary General, Sri Lanka Banks Association and Editors of
national newspapers )

By W.T.S. F. Abeysinghe

It is baffling, that despite terrorism, civil war, tsunami, financial crises or any other crises affecting all other sectors, how Sri Lankan banks make ‘hay’, day and night, every day. 
Annually, the government is happy to take away more than 50% of profits from the banking sector as various ‘Taxes,’ and the regulatory authorities hardly seem to bother as to how the profits are made.   
What is the magic in high bank profits? Is it due to exceptional skills of bank boards, CEOs or some black magic? 
Sri Lankan Banks (including the State Banks) are culpable of ‘Picking the Pockets’ of hapless, financially illiterate, gullible and ignorant fellow Sri Lankan people to make fat profits and enjoy fat bonuses, whilst the Financial Ombudsman and the Central bank seem to be taking a deep slumber.  
A simple illustration indicating the disparity of interest paid and charged by most local Banks (including state banks) to the retail and high net worth customer segments can be found in the graphic.
Hugely discriminatory interest margins positioned at distinct customer segments as above, simply illustrate how the baffling bank profits are made annually - mostly out of underpaid savings/individual/retail customer segment.
How can most banks sustain an interest spread of 9 - 28% from individual/retail customers’ vis. a vis. 4 - 5% from high net worth/corporate clients? What’s the gimmick? – Is it gullibility or ignorance of poor people or both?
It is clearly evident that most banks target predominantly the ignorant and illiterate customers in the individual/retail segment for this blatant exploitation.
What is more atrocious is that despite the corporate sector and the high net worth customers being the biggest defaulters in bank lending, they are being treated with preferential rates. Whilst numerous allegations of corruption exist here, I am baffled to comprehend the underlying rationale even from a business perspective.
Furthermore, most banks offer unethical incentive schemes resembling de facto ‘lotteries’ to entice and mislead the ignorant and illiterate public, offering millions in cash and other prizes such as houses and luxury vehicles. Ignorant public little realises that these prizes are mostly paid out of underpaid savings interest whereas only a handful among millions of customers succeeds in lotteries. A rampant allegation of corrupt practices involving such schemes is another debate.
Deposits mobilised from savings account holders usually constitute about 30 - 50% of the total Deposit Base in most commercial banks. These hapless account holders, investing their life savings, EPF, gratuity or sale proceeds of property in a bank savings account are usually ignorant of the higher deposits rates for various other account products on offer with fancy names, which are usually designed to disguise the actual benefits as compared to normal savings accounts. Annually banks spend Rupee billions in TV and Press advertisements to entice more and more ignorant people to open low interest yielding accounts.
Most notable victims in such exploitation are the Minor Savings account holders – where the funds are not allowed to be withdrawn for several years, (until the minor attains 18) yet interest paid can be a pittance or mere  5% -12%
Low interest paid on bank deposits, is obviously one more reason why many people resort to dump their money in recently exposed several infamous/unregulated operations like Ceylinco F&G, ShriRam, Sakvithi, Golden Key etc., attracting dire consequences.
Although commercial banks have to factor the cost of CBSL Statutory Reserve Requirements (SRR), benefit from recent reductions in SRR from 10% to 7.75% has not been passed on to the depositors or borrowers in individual/retail category.
I observe that the modus operandi illustrated above is a ‘colossal national crime’ for the following reasons; 
It causes millions of ignorant and illiterate Savings account holders to become poorer every day, thus making the entire nation poorer by shrinking the buying power in them.
As per 2008 CBSL annual report commercial banking sector had over Rs 500 billion in Savings account deposits. With every 1% in Savings interest underpaid costing the depositors Rs 5 billion; the gross amounts snatched away from Savings depositors can be over Rs. 20 billion (assuming that they should be paid at least 4% more interest).
It is obvious that most CEOs, and Corporate managements in local banks are able to hide their inefficiencies, probable internal corruption, losses from injudicious credit decisions and undue overheads to show fat annual profits, primarily by denying poor savers a fair and reasonable interest.
In a realistic analysis the local banking sector which appears to be highly profitable at a glance could be potentially incurring losses if the savers are paid a due interest as their intermediation cost is among the highest even among regional banks.
The above predicament has huge implications on investments in real sectors in economy as employment and wealth creation are affected at national level due to high borrowing costs as well as suppressed savings.
Underpayment of interest in such magnitude, discourages savings habit, harms the organic growth in national savings, affects real GDP/GNP of the country declared by CBSL, creates other socio-economic mismatches and causes the government to seek more foreign investments and/or borrowing for development purposes annually.
It is apparent from the above observations, that the whole nation has to pay a huge economic cost to maintain a mediocre banking industry riddled with high overhead expenses and inefficiency.
Furthermore, it is questionable whether Sri Lanka can ever be developed as a financial hub and/or any Sri Lankan Bank can ever become an international bank under these circumstances.
I observe that the ‘state’ also should be held responsible for this heinous crime due to the following reasons; 
CBSL has failed to take cognisance of devastating ramifications as described above and do justice to poor savers by insisting on minimum/maximum interest rates on Bank deposits and lending.
CBSL has failed to prevent the Banks from engaging in de facto lotteries to deceive financially ignorant people.
CBSL is either ignorant or impotent to reduce the cost of borrowing.
Inland Revenue Department is happy to pocket a composite tax of more than 50% of unethical profits made by Banks and turn a blind eye on how the profits are made.
I wish to propose your intervention in the capacity of Minster of Finance to direct all banks as follows; in order to give these disadvantaged savers in this country a fair deal. 
Stop Banks from engaging in lotteries (directly or indirectly) where just a handful is benefited gambling on their luck– It is unethical for Banks to engage in lotteries (gambling) incurring huge unwarranted promotional costs at the expense of ‘unlucky’ depositors. Several billions of Rupees saved annually in all Banks in this manner can be used to pay higher interest to exploited savers.
Pay a minimum of 60-75% of the One Year Fixed Deposit rate paid by the respective Bank as interest on all Savings Accounts.
Maximum loan/overdraft interest charged not to exceed 30-40% more than the One Year Fixed Deposit rate paid by the respective Bank.
All minor’s savings accounts to be paid at least 15-20% interest over and above the One Year Fixed Deposit rate paid by the respective Bank
As sufficient regulatory powers are vested in the CBSL, a rationalised interest formula adopted based on the above principle will immediately abort numerous account types in Banks with various fancy names, so called ‘bonus interest’ schemes etc., which have been covertly structured to disguise, mislead and exploit the ignorant public.  
It will also enable all Banks to substantially bring down high administrative costs (with leaner, simpler and less complicated deposit products) and realistically assess viability of their own operations. Eventually unprofitable banks should be compelled to consolidate, making the industry vibrant and competitive.  
In the long term national interest, this is a better option for the entire local banking industry rather than allowing them to thrive on ill gotten income. 
My belief is that bankers should act as paragons of virtue and be above board in terms of integrity. Sadly, today such bankers seem to be an extinct species in Sri Lanka. 
There is hardly any doubt in whether banks have to be run in a profitable manner. However, in my view the way forward is to reduce overheads, levy enhanced charges for various services provided (where the actual consumer pays on volume) and definitely not to plunder from poor savers.  
It is hilarious to note, many Banks are ceremoniously adjudged winners of so called ‘Corporate Social Responsibility’ (CSR) awards annually.  I firmly believe that the Best CSR any Bank can engage in is to pay every financially illiterate/ignorant poor saver, a justifiable interest rate.
At a time when the government is working tirelessly to infuse an economic revival and alleviate poverty in the country, it is imperative to  look in to the aforementioned disparities, unfair trading practices and the enormous exploitation caused by local Banks which certainly negate the efforts of the government. 
Should not the banks, their directors and CEOs have moral/social obligations to conduct an ethical and transparent business by giving a fair deal to the public - in particular the economically disadvantaged?  
Should the CBSL being the regulator with adequate statutory powers vested in them, be allowed to continue as a mere squint-eyed spectator in this mass exploitation?  
I believe that CBSL should not hesitate anymore to take drastic steps which should include punitive action against Banks which fail to act in the best interest of the public. 
Considering the lackluster actions by the regulators, intervention is imperative to give the hapless savers in local banks a fair deal.