A wise move

The action by the Central Bank of Sri Lanka to prevent the collapse of a major financial institution and spare the country of its consequence on the economy no doubt would come in for high praise by the public.

It’s timely intervention to bail out the crisis ridden Seylan Bank also averted what would have been a major upheaval given the recent chaos witnessed in the wake of collapsed Finance companies.

The Seylan Bank by all accounts was on the verge of collapse due to a steady run on its deposits in the wake of the Ceylinco Golden Credit Card fiasco, when it was announced that a stake in Seylan would be sold out to honour the debts of the Golden Card depositors.

This naturally triggered a panic among Seylan depositors as could be expected precipitating heavy withdrawals. The CB justifying its action said the difficulties of Seylan presented a potential danger to the stability of the financial system. Hence the intervention by its Monetary Board to salvage the situation and restore depositor confidence.

It has assured depositors that their money was safe and the Bank commenced operations under a Board Constituted by the Bank of Ceylon, doubly guaranteeing investor confidence. Now the depositors would be easy in mind having strong State backing for their investments.

The CB has reinforced this confidence by urging depositors to have trust in the new dispensation. This perhaps is the first time that the Central Bank has taken affirmative action to prevent the collapse of a financial institution beforehand.

The Central Bank action is also a prudent one at a time of a major global recession that is yet to see its fallout in Sri Lanka. The Governor of the Central Bank has claimed that the economy has so far held out, when those of the developed world were collapsing, was a testament to the firm fiscal policies put in place by the present Government to avert such a calamity.

Thus it goes without saying that any tremors in the financial sector such as the crash of a Bank is bound to have their reverberations leading to disintegration of the solid economic structures that has been put in place. It could also trigger a domino effect on other financial institutions occasioned by a loss of depositor confidence.

Already the Sakvithi scam has instilled fear in the people against investing their money in Finance Companies and even Banks. This could be disastrous for the economy as Banks are the life blood of economic activity.

It is loans and borrowings from Banks that keep industries and other commercial activity going. Loans are also obtained to expand industries and stimulate growth not to mention employment generation. Therefore, Banks are the fulcrum on which all economic activity revolves.

Besides, the Central Bank could not afford to take a chance after the recent saga of Finance companies. This move by the Central Bank to stop the slide of a major financial institution no doubt would go a long way in infusing confidence in the depositors of all Banks thus giving a fresh boost to the Banking sector and by extension the stability of the economy.

There is no doubt that the open economy and liberation has allowed banks to venture out of their traditional business which, in turn involve heavy risks. That is why a more forceful and effective mechanism is needed to ensure that these financial institutions don’t fare forth into high risk ventures for amassing unconscionable profit.

For, what is at stake is the depositors’ money. The Government should look into ways to add more teeth to the Banking laws that would restrict Banks from plunging headlong into territory that would endanger the money of depositors.

True, profits by themselves is not a bad motive. After all Banks like all other businesses cannot survive without profit. But a balance needs to be struck keeping in mind that they are playing around with public funds. Banks should also contribute more to the concept of corporate-social responsibility.

This move by the Central Bank to provide a State guarantee to the money of depositors of a struggling venture preventing it from collapse no doubt is going to infuse fresh confidence in the country’s Banking system by both depositors and the business community which redounds to the good of the economy as a whole.