Central Bank’s autonomy challenged in budget 2017

Certain controversial proposals in the budget 2017 are likely to have massive implications on the country’s financial system and the independence of the Monetary Board (MB) of the Central Bank, according to a leading economist in the country.

The 2017 budget, which was presented to parliament last week, proposed to set up a National Payment Platform (NPP) implemented by the state-run Information Communication Technology Agency (ICTA) to facilitate all government and private sector online/electronic transactions.

“The ICTA will also implement the National Payment Platform (NPP), which will facilitate persons, businesses and government to make peer-to-peer payments, including fund transfers and online payments for goods and services, using computing devices, including mobile devices,” Finance Minister Ravi Karunanayake said.

According to economist and former Central Bank Deputy Governor W.A. Wijewardena, this is a clear case of the country’s finance minister trying to interfere in a “massive scale”, with the responsibilities of the Monetary Board of the Central Bank.

“The Central Bank was established in 1950 to decide on the country’s monetary and banking policies independently without any interference from politicians. The payment system is the responsibility of the Monetary Board of the Central Bank,” Wijewardena told a post-budget forum in Colombo, organised by the University of Sri Jayewardenepura, last Friday.

“The reason is that, when we make an electronic payment we should be satisfied that the payment we make reaches the person or institution we intended to,”he added.

“For example, I pay taxes through cheques. So, when I make such payments, I need to be sure that my money goes to the account of the Director General of the Inland Revenue Department and not to an account in Nigeria or somewhere,” Wijewardena quipped.

He reiterated that the payment system of the country should be designed and handled by the Monetary Board of the Central Bank. The Central Bank in collaboration with LankaClear, the national payment infrastructure provider, is said to be currently working on the country’s national payment system called ‘Sri Lanka Payment Gateway’.
Wijewardena, who is also a widely-read newspaper columnist on economic matters, disapproved the finance minister’s high-handed approach towards trying to indirectly regulate the country’s banking sector, a duty that clearly falls under the Central Bank as the banking industry regulator.

“Banks should be regulated by the Central Bank. The finance minister says I’ve taken a decision to increase capital for banks. I don’t believe this sets a good precedent,” he remarked.  In what appeared to be an apparent attempt to push the banking industry to consolidate, Karunanayake in the budget 2017 proposed to double the minimum core capital level of the banking sector to Rs.20 billion from the current Rs.10 billion.

“Such consolidation of banks will enhance the size of the banks, facilitate the fund raising from diversified sources, enhance risk taking capacities and enable banks to participate in large state and private sector projects to a greater degree than at present and derive scale benefits with regard to operational costs,” he said.

The Central Bank under the Mahinda Rajapaksa administration launched a programme to consolidate the country’s banking sector by force but it was abandoned by the Sirisena-Wickremesinghe government, who said mergers and acquisitions in the banking sector should take place voluntarily.  

Wijewardena also criticized the finance minister’s move directing banks to lend to priority areas of the economy.  
“This is not a job of the finance minister but of the Monetary Board of the Central Bank. For so many years the Central Bank has been asked to direct banks to provide loans to priority areas. India has been doing this since 1948. But after looking at them we decided we shouldn’t do it,” Wijewardena said.

However, in 2004, an amendment was brought into Sri Lanka’s Monetary Law Act, directing the banking sector to lend 10 percent of its lending portfolio to the agricultural sector.

“The banks haven’t been able to do that. The plan was for farmers to get these loans. But when you say agriculture, it also includes plantation industry,” he pointed out.

Interestingly, the budget 2017 calls for banks to lend 50 percent of its loan portfolio to priority areas.  

“I direct banks to ensure that at least 10 percent of their lending portfolio is for agriculture, 10 percent for SME (small and medium-scale enterprises), 10 percent for exports, 10 percent for tourism, 5 percent for youth and 5 percent for women,” Karunanayake said in his budget speech.

Wijewardena reminisced his days as Director of Rural Credit at the Central Bank and brought in an anecdote to show the ineffectiveness of such policy decisions.

“When I was Director of Rural Credit at the Central Bank, we asked the banks to give loans to small businesses. So the banks said they had lent to over 600 small-sized rice mills. We knew this was impossible as Sri Lanka didn’t even have so many rice mills.

But the files of these loans with the banks even contained photographs of these mills. So I had to visit these rice mills in person to uncover the truth. As you may have guessed most of the addresses didn’t have rice mills,” he remarked.

Meanwhile, making what appears to be a community reinvestment proposal, Karunanayake directed the banks to lend at least 15 percent of their deposits within the same areas they were raised for business development.
“This is a business decision the banks should take and not one to be taken by the finance minister. The job of the finance minister is to make the people in these areas eligible to borrow,” Wijewardena noted

“Under these circumstances, if banks couldn’t find people qualified to borrow, what will eventually happen is, the relatives and friends of the bank managers will get loans,” he quipped.   The finance minister’s move to recommend to the Credit Information Bureau (CRIB) to not provide credit history of those creditors with a cumulative loan size up to Rs.500,000, also drew criticism during the forum, which was attended by academics, politicians and university students.

As Wijewardena pointed out, the CRIB only provides records about borrowings and the banks have the discretion to take those records into consideration in their decision-making process to provide loans to creditors.

“When we started the cap was Rs.25, 000 but then we brought it down to 5000 because a lot of microfinance loans go unpaid,” Wijewardena, who was the first General Manager of the CRIB, said.

Video by Buddhi