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Government meddling in banks destroys value

07 Aug 2014 - {{hitsCtrl.values.hits}}

By Dilina Kulathunga

Increasing government interference in banks destroys their value because the poor governance makes it difficult for such banks to raise capital at competitive rates, according to a top HSBC official from the Asia Pacific region.

According to HSBC Asia Pacific Director Naina Lal Kidwal, governance is a key issue in public sector banks.

“Yes, government-owned banks can raise money but why are they not able to raise at the same rate as the private sector banks? The answer is the governance issues, interference by the government and those banks operating according to government agendas,” she said at the 15th Sri Lanka Economic Summit.

Sri Lanka’s two largest commercial banks, Bank of Ceylon and People’s Bank, are fully owned by the National Treasury and they are being used as finance vehicles by the government to support its economic agendas and to interfere in the foreign exchange market in minimizing exchange rate volatilities.

In recent times, questions have also been raised by many quarters to the increasing government stakes and board representations in private sector commercial banks.

The director board composition of the two largest private banks, Commercial Bank PLC and Hatton National Bank PLC, have been highlighted by many in the recent times in this regard.

“We destroy the value of the banks if we allow the banks to fall under the arms of the government,” Kidwal cautioned.
Drawing parallels from India, she said the shares of private banks in India such as ICICI Bank and Axix Bank are trading at multiples three to five times higher than the government-owned banks.

“For me, that says it all,” she said.

She said that the Reserve Bank of India is now working on a model to enhance the governance of the public sector banks enabling them to operate independently and free from government interference.

She said this made them far easier for the public banks to raise capital at far better prices (rates) than otherwise.
However, Sri Lanka’s largest government-owned bank, Bank of Ceylon, raised capital both locally and internationally at very attractive rates leveraging its balance sheet strength.

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Government meddling in banks destroys value

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