Sri Lanka merges ‘election’ banks after two year experiment

Nov 17, 2006 (LBO) – After creating two new state banks in successive budgets, Sri Lanka’s government is planning to merge and consolidate them with a network of existing rural banks. Sri Lanka already has two development banks, as well as medium term credit facilities that are channeled through commercial banks. The SME Bank was created in 2005 to fulfill a pledge to help small and medium domestic enterprise in the run up to parliamentary elections, and Lankaputhra Bank (which means sons of the soil) was created ostensibly for the same reason, but to give effect to an election promise made during a presidential poll.

Sri Lanka’s state commercial banks run up large losses due to politically directed bad lending, and have been bailed out with government money on three occasions in the last 15 years.

Some analysts have warned that Lankaputhra Bank which did not have access to the credit information when it was set up may be exposed bad risks when blacklisted but politically powerful borrowers start knocking at its doors.

But officials said at the time they are taking extra care to in approving loans.

The regional rural development banks were set up with equity infusions from the Central Bank of Sri Lanka as part of a rural credit drive, but the banks have since been handed over to the treasury.

The regional banks have a wide-ranging branch network and even field staff that work closely with small rural borrowers such as farmers, transport contractors, fishermen and traders.

All these banks will be merged into a single large development bank through an act of parliament to create a well-capitalized bank worth five billion rupees.

The government intends to boost Lankaputhra Bank’s capital to ten billion rupees over the next five years.

Once consolidated, the employees of the former banks will be absorbed in to Lankputra Development Bank the Minister says.

Rajapakse hopes to channel the credit facilities provided by the 2007 national budget to government agencies through the new bank network.