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Watching Brief - Sri Lanka should watch external developments, learn lessons: banker
Mar 17, 2012 (LBO) - Sri Lanka should watch global developments closely, in particular the unfolding scenario in Europe and learn lessons, Saliya Rajakaruna, chief executive of the Nations Trust Bank has said.
Rajakaruna said the US economy was still struggling, the future of the Euro single currency was in doubt, the Middle East was in turmoil and Even India and China was beginning to slow down and showing signs of stress.
Global red lights
"Among the many issues so confronting the global economy, the European debt crisis remains the most intractable threatening to engulf other geographies," he told shareholders in the bank's annual report.
"Debt has been an important driver of the European economies. Over the years their private sectors, households and governments borrowed heavily to finance growth and remain significantly leveraged.
"The mis-match, particularly of public finances and resulting sovereign borrowings, has now transferred to the financial system threatening their banks and perhaps those in other countries."
He warned that growing austerity measures in many counties may impact Sri Lanka and the island had to learn the lessons of credit and rely less on credit in the future for growth.
Rajakaruna, a former Citi banker was earlier also at state-run Bank of Ceylon and has been instrumental in keeping the bank out of oil derivatives, according to earlier reports.
"For Sri Lanka, an import dependent export economy underpinned by external remittances and tourist earnings, what happens overseas is inextricably linked to her wellbeing," Rajakaruna said.
"Now emerging out of a 3-decade insurgency and looking for a fresh but accelerated growth, the state of the global economy will not only affect its performance but also offers some lessons in economic management.
"Diversification of export markets and energy supply, less reliance on debt and a more balanced slower longer term approach for sustained growth are among them."
Unstable Peg
He said strong domestic credit growth had put pressure on a dollar peg, and Central Bank defence of a dollar peg had created liquidity shortages and put pressure on interest rates.
"To manage the shortage of liquidity, CBSL injected rupees via the purchase of Treasury Bills thereby accumulating a significant portfolio of them, some Rs.200 Bn, a new phenomenon since the end of terrorist activity," he noted.
Central Bank's Treasury bill portfolio has now risen to nearly 240 billion rupees, a silent monument of additional demand injected in to the economy via printed money.
Sri Lanka has had balance of payments trouble since shortly after the creation of the Central Bank, when it got the power to print money by purchasing Treasury bills and create high inflation and currency depreciation.
Before 1950, when the state had no power to print money, interest rates floated freely and the exchange rate was fixed for over 65 years.
Free floating interest rates, and no powers to sterilize interventions in forex markets serves as an automatic check on excessive credit growth when an exchange rate is defended.
Early Warning
Rajakaruna was also perhaps the first banker in Sri Lanka to speak out public on high credit growth in the early stages of Sri Lanka's current balance of payments crisis.
In September 26, within two weeks of the Central Bank starting to sterilize interventions, Rajakaruna warned of high domestic credit growth in an interview published in Sri Lanka's The Island newspaper.
"The fear is that rapid growth in private sector credit has led to the growing import demand, which has led in turn to the build up of pressure on the exchange rate," he said in September.
"It is difficult to blame either the banks or their customers. It reflects perhaps the pent up demand held dormant over a protracted period, now coming to the fore as freedom takes root. Such demand is likely to be self-correcting as satisfaction levels increase.
"Banking sector credit growth which brings with it pressure on interest rates and inflation should, however, concern all; everyone needs to cool down now.
"Banks should look more at sustaining their longer term positions and less at driving consumption-led credit growth."
Rajakaruna said banks should be careful of defaults if high interest rates persist.
"If interest rates go up in the face of these pressures, the fear is, despite focused mitigation efforts, a rising trend of non-performing loans if the expanding loan growth sucked-in bad credit as well."
Demand Neutral
Nations Trust Bank grew its loan book 38 percent in 2011.
However it also grew its deposit at the same pace. It was one of the first banks to raise interest rates when balance of payments trouble began.
A bank that raises deposits to fund its advances even at high rates create no pressure on the exchange rate, as the deposits raised kills an equal amount of demand as that is created by credit.
Globally also banks were coming under fresh economic and regulatory challenges.
The international experience was that, though profits recovered in 2010 to 3.8 trillion dollars globally, up from only 400 billion in 2009, profitability as a return on equity was much lower, he said.
"It is clear that business as usual is not an option for banks," Rajakaruna said. "Indeed as noted in the recent 2012 DAVOS Meeting, banks may have to think in terms of a return to basics.
"For the time being banks are squeezed for capital and liquidity, profits are under pressure, and growth opportunities in many markets appear to be in short supply."
http://lbo.lk/fullstory.php?nid=948195894
Mar 17, 2012 (LBO) - Sri Lanka should watch global developments closely, in particular the unfolding scenario in Europe and learn lessons, Saliya Rajakaruna, chief executive of the Nations Trust Bank has said.
Rajakaruna said the US economy was still struggling, the future of the Euro single currency was in doubt, the Middle East was in turmoil and Even India and China was beginning to slow down and showing signs of stress.
Global red lights
"Among the many issues so confronting the global economy, the European debt crisis remains the most intractable threatening to engulf other geographies," he told shareholders in the bank's annual report.
"Debt has been an important driver of the European economies. Over the years their private sectors, households and governments borrowed heavily to finance growth and remain significantly leveraged.
"The mis-match, particularly of public finances and resulting sovereign borrowings, has now transferred to the financial system threatening their banks and perhaps those in other countries."
He warned that growing austerity measures in many counties may impact Sri Lanka and the island had to learn the lessons of credit and rely less on credit in the future for growth.
Rajakaruna, a former Citi banker was earlier also at state-run Bank of Ceylon and has been instrumental in keeping the bank out of oil derivatives, according to earlier reports.
"For Sri Lanka, an import dependent export economy underpinned by external remittances and tourist earnings, what happens overseas is inextricably linked to her wellbeing," Rajakaruna said.
"Now emerging out of a 3-decade insurgency and looking for a fresh but accelerated growth, the state of the global economy will not only affect its performance but also offers some lessons in economic management.
"Diversification of export markets and energy supply, less reliance on debt and a more balanced slower longer term approach for sustained growth are among them."
Unstable Peg
He said strong domestic credit growth had put pressure on a dollar peg, and Central Bank defence of a dollar peg had created liquidity shortages and put pressure on interest rates.
"To manage the shortage of liquidity, CBSL injected rupees via the purchase of Treasury Bills thereby accumulating a significant portfolio of them, some Rs.200 Bn, a new phenomenon since the end of terrorist activity," he noted.
Central Bank's Treasury bill portfolio has now risen to nearly 240 billion rupees, a silent monument of additional demand injected in to the economy via printed money.
Sri Lanka has had balance of payments trouble since shortly after the creation of the Central Bank, when it got the power to print money by purchasing Treasury bills and create high inflation and currency depreciation.
Before 1950, when the state had no power to print money, interest rates floated freely and the exchange rate was fixed for over 65 years.
Free floating interest rates, and no powers to sterilize interventions in forex markets serves as an automatic check on excessive credit growth when an exchange rate is defended.
Early Warning
Rajakaruna was also perhaps the first banker in Sri Lanka to speak out public on high credit growth in the early stages of Sri Lanka's current balance of payments crisis.
In September 26, within two weeks of the Central Bank starting to sterilize interventions, Rajakaruna warned of high domestic credit growth in an interview published in Sri Lanka's The Island newspaper.
"The fear is that rapid growth in private sector credit has led to the growing import demand, which has led in turn to the build up of pressure on the exchange rate," he said in September.
"It is difficult to blame either the banks or their customers. It reflects perhaps the pent up demand held dormant over a protracted period, now coming to the fore as freedom takes root. Such demand is likely to be self-correcting as satisfaction levels increase.
"Banking sector credit growth which brings with it pressure on interest rates and inflation should, however, concern all; everyone needs to cool down now.
"Banks should look more at sustaining their longer term positions and less at driving consumption-led credit growth."
Rajakaruna said banks should be careful of defaults if high interest rates persist.
"If interest rates go up in the face of these pressures, the fear is, despite focused mitigation efforts, a rising trend of non-performing loans if the expanding loan growth sucked-in bad credit as well."
Demand Neutral
Nations Trust Bank grew its loan book 38 percent in 2011.
However it also grew its deposit at the same pace. It was one of the first banks to raise interest rates when balance of payments trouble began.
A bank that raises deposits to fund its advances even at high rates create no pressure on the exchange rate, as the deposits raised kills an equal amount of demand as that is created by credit.
Globally also banks were coming under fresh economic and regulatory challenges.
The international experience was that, though profits recovered in 2010 to 3.8 trillion dollars globally, up from only 400 billion in 2009, profitability as a return on equity was much lower, he said.
"It is clear that business as usual is not an option for banks," Rajakaruna said. "Indeed as noted in the recent 2012 DAVOS Meeting, banks may have to think in terms of a return to basics.
"For the time being banks are squeezed for capital and liquidity, profits are under pressure, and growth opportunities in many markets appear to be in short supply."
http://lbo.lk/fullstory.php?nid=948195894
