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Despite this warning, there has not been any attempt by the
Minister of Finance or the Central Bank at revisiting the proposal
in the Budget to ascertain its validity, consistency and suitability.
Instead, the Central Bank has issued a circular to commercial
banks under the hand of its Director of Bank Supervision
expressing its wish that all banks may take appropriate
measures to implement the following:
The Central Bank, following the national policy framework for SME
development, has defined SMEs as those with an annual turnover
not exceeding Rs. 750 million. Banks will find it difficult to remain
within this definition since all enterprises which may cross the
threshold limit will not be considered as SMEs and when it occurs,
they will have to go looking for new borrowers who could be
treated as SMEs.
The original Monetary Law Act or MLA had not empowered the
Central Bank to direct commercial banks or any other financial
institution to maintain a minimum percentage of loans which they
shall grant to any identified sector of the economy.
The architect of MLA, John Exter, did not think that it was
necessary. The Monetary Board too did not feel that the Central
Bank should go for such mandatory credit allocations to identified
sectors despite its counterpart in neighbouring India, namely,
Reserve Bank of India or RBI, had done so from around 1967. The
frustrating experience which India had with such priority sector
lending made the Monetary Board consistently go by that
decision.
The Central Bank invoked the provisions of this section in the case
of agricultural loans under which commercial banks were required
to maintain a minimum quantum of loans to borrowers in this
sector at 10% of their loan book.
However, the current circular has not made use of the powers
which it enjoys under this section but simply has informed
commercial banks that they may provide the minimum
percentages of loans to those six identified sectors or borrowers.
But banks are required to report back and if they do not meet with
the minimum requirement, the Central Bank has the choice of
issuing formal directions to them by invoking the provisions in
MLA.
Economic rationale of using mandatory credit allocations
Then, the credit flows fall short of the socially desirable levels.
Instead of taking measures to address the structural issues,
politicians think that they can sort the problem by directing banks
to mandatorily lend to these sectors.
Undesirable consequences of mandatory credit
allocations
Since then, RBI has simply modified the system from time to time
while retaining the system as a credit allocating method for what
has been identified as priority sectors, because once introduced,
it cannot be taken away without causing political turmoil.
The circular has shocked commercial banks which had not been
prepared to undertake such a feat without advance notice. The
staffs of banks have not been trained to identify creditworthy,
viable loan proposals which prospective borrowers might present
to them. Hence, the introduction of a mandatory credit allocation
system without consulting banks or appreciating their practical
problems has been a real shock to them.
The Prime Minister has been very emphatic about following this
economic policy to deliver prosperity to people. Hence, the action
taken by the Ministry of Finance and the Central Bank to impose
mandatory credit minimums, an unworkable intervention in the
market, has not only shocked the banks but also betrayed the
Prime Ministers social market economy policy.
(W.A. Wijewardena, a former Deputy Governor of the
Central Bank of Sri Lanka, can be reached at
waw1949@gmail.com)
Posted by Thavam