Making Sense

June 21, 2007 (LBO) – Sri Lanka is to merge two state banks created as a result of election promises in the recent past, but keep a regional banking network with a good credit culture as an independent entity, officials said. Officials say Lankaputhra can take-over SME Bank under the provisions of company law, but the governing law of the regional banks had to be amended to consolidate them. The last budget said two newly created banks, SME Bank and Lankaputhra Development Bank would be merged with an existing network of six regional development banks.

However the proposal came under fire as the regional development banks were had just emerged from a bad patch and their financial health was starting to improve. In addition their mission was different from the other two banks.

All the regional development banks had investment grade ratings above BBB- (lka).

Fitch Ratings put the banks on 'ratings watch' indicating that it may have to downgrade them if a merger with SME Bank went ahead, as it had 31 percent dud loans.

"SME Bank's asset quality on its loan portfolio was quite weak with non performing loans to gross loans at a high 31 percent at September 2006," Fitch Rating warned at the time.

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