State Banking

June 20, 2010 (LBO) – Lankaputhra Development Bank, a state bank set up to fulfill an election promise, has increased its bad loans to 55.9 percent in 2009, from 19.2 percent a year earlier, a government report has revealed. Lankaputhra or ‘sons of the Lanka’ bank was set up to fill a supposed lack of credit to small and medium enterprises after in 2005 after state development banks were put under private management in the late 1990s.

Analysts had warned that the bank would attract ‘sons of the soil’ who are defaulters with political connections following the experience of SME Bank (Small and Medium Enterprises Bank) which was set up to give effect to an election promise in 2004.

Reforms at the two largest state banks, Bank of Ceylon and Peoples’ Bank, which tightened credit standards, had made it difficult for defaulters with political connections to get loans. The two banks had been bailed out twice in the 1990s.

SME Bank was merged with Lankaputhra along with its bad loans and a fresh capital injection from people’s money.

Among the borrowers of Lankaputhra was the controversial Mihin Air, a state-run airline that has come under fire from critics as a symbol of government mis-management and mis-uses o