Towards flexible loan management

Treasury Secretary Dr P B Jayasundera has rapped the country’s banking sector for making things difficult for borrowers. Delivering the 60th Anniversary Oration of the Central Bank he said, “We in the Treasury often hear from our private sector, the difficulties of borrowing.

Access to finance as well as high cost of interest despite a well distributed branch network around the country, are two main concerns that the entire private sector keeps raising from the Government from time to time”. He also said there is concern over the rigidity towards re-adjustments in lending rates as well as over the long lag involved in such adjustments.

As the Treasury Secretary has rightly pointed out in the post conflict context, our private sector deserves some relief from the banking sector. Today, most enterprises which were shut down and performing below par due to security risks are witnessing a gradual renaissance. They should be given all the assistance by the banks to put them back on their feet. Rigid regulations in lending should be reconsidered since this would discourage private sector initiative. The private sector as is often said is the engine of growth.

Besides our private sector by and large held out gallantly in the wake of the recent global economic downturn when companies and financial institutions in most countries were falling apart. Their resilience should be acknowledged and appreciated.

But what has been happening is they have been unduly penalized and many defaulting customers humiliated with their names made to appear on the Credit Information Bureau(CRIB). This in a situation when the private sector has performed in a high interest rate regime where their cost of borrowing has been in excess of 30 percent. As the Treasury Secretary says, in many instances banks have recovered the capital through very high interest and debt capitalization.

He has advocated a more lenient approach such as restructuring of non performing loans and under performing businesses to recover their loans. He has dissuaded banks from resorting to the easy option of applying the provisions of debt recovery legislation.

True, banks too are in business and operate with the profit motive. As such, it has to ensure its investments are protected and guarded against losses. But as the main oxygen that keeps the country’s business and commerce ticking a more pragmatic approach is called for. Today, we read of many instances where businesses are auctioned by banks for loan default and recourse to such measures as parate execution where assets of business enterprises are seized.

What would inevitably result from such a course of action is the stifling of growth as business ventures would have second thoughts of expansion leading to overall stagnation in the commercial sector. As Dr Jayasundera said debt recovery legislation has made risk taking farmers and industrialists vulnerable to legal action. This is more so in the case of Small and Medium-scale enterprises that depend on bank loans to keep them afloat.

Therefore the whole banking system needs an overhaul and the grey areas dealt with. What is needed is a holistic approach. In this regard attention should also be paid in respect of the grievances of depositors who are complaining about the dwindling rates of interest on their deposits. The withdrawal of the bonus on interest for senior citizens should be restored since the worst affected are the pensioners who are solely dependent on this interest for the purchase of their medication including expensive drugs.

There is no denying that today, the collapse of finance companies and many other swindles in the financial sector have made people wary of depositing their monies in banks and finance companies. This can only lead to the erosion of the deposit base resulting in liquidity problems for banks which will be devoid of cash for lending causing de-stability in the country’s banking sector.

This the country can ill-afford at a time it is set to take off in post war development where banks and other financial institutions will have a major role to play.Therefore all steps should be taken to do away with moribund laws governing the banking sector to make them more dynamic and people oriented instead of being impersonal, distant and solely profit oriented.

Saying that, our banks should also be commended for the social corporate responsibility it has displayed especially during the war years particularly in relation to the welfare of soldier families, being in the forefront of many projects. Now that the war is over, hopefully such a spirit would be extended to the country’s business community particularly the SMEs so that they may progress and expand giving that added fillip to the economy.