The Great Bank Feast in Sri Lanka: A Troubling Tale of Profits and Power
In the land of Sri Lanka, a peculiar feast is underway, where banks thrive while the nation struggles. As headlines boast of trillion-rupee assets and billion-rupee profits, one can't help but wonder: how is this possible in a country still reeling from economic turmoil?
The Art of Extraction
The secret lies in a subtle yet powerful spread. While the Central Bank's policy rate hovers around 7.75%, banks offer depositors a mere 6-9% on fixed deposits and charge borrowers a staggering 14-24%. This interest rate spread, engineered on top of a narrow policy corridor, is the lifeblood of their profitability.
What's intriguing is how this spread defies international norms. In comparable economies like India, Thailand, and Vietnam, spreads are significantly lower, typically below 5 percentage points. Even advanced economies like Japan, Australia, and the US maintain single-digit spreads. Sri Lanka's banks, however, operate in a league of their own, seemingly immune to competition.
The Three-Stage Predatory Dance
A financial analyst's metaphor paints a vivid picture. Sri Lankan banks, he suggests, are like an octopus, a leech, and a snake, each with a distinct role in their predatory dance.
First, the octopus embraces its customers, entangling them in a web of financial services. From salary accounts to insurance, they become indispensable. Then, the leech emerges, slowly extracting profits through high-interest rates and fees. The victim, often a small business, is trapped, unable to escape the financial grip.
Finally, the snake strikes. Sri Lanka's unique Parate Execution Law allows banks to seize and auction mortgaged properties without legal oversight. This power, rarely seen elsewhere, ensures the bank's profit, even at the cost of a business's demise.
Digital Disruption and Dinosaur Banks
Bill Gates once predicted that banks would become obsolete in the digital age. Yet, Sri Lankan banks have adapted, embracing technology while maintaining their grip on profits. They were early adopters of ATMs and internet banking, reducing costs while preserving pricing power.
However, the relationship between bank profits and the real economy remains distorted. In a healthy market, high profitability indicates efficient investment. In Sri Lanka, it signals a transfer of wealth from small businesses to banks, facilitated by lax regulation and powerful legal tools.
The SME Struggle
Small and medium enterprises bear the brunt of this system. These businesses, vital for employment and entrepreneurship, face astronomical interest rates and harsh recovery mechanisms. The International Monetary Fund's call for stricter loan recovery measures may seem sensible, but it ignores the root cause: a broken system that punishes borrowers.
Time for Reform
The solution is not to abolish banks but to transform the system. Three crucial reforms are overdue. First, regulatory oversight must cap the interest rate spread, ensuring fairness. Second, the Parate Execution Law needs an overhaul, introducing judicial scrutiny and mediation. Lastly, SME credit must be restructured, offering regulated spreads and refinancing support.
The current situation is akin to a parasite feeding on its host. If left unchecked, it could lead to the host's demise. Sri Lanka's banks must be held accountable, and the government must intervene to protect its citizens and businesses. The feast cannot continue indefinitely, and the time for change is now.
