Four days ago (28 May) I read a news item that appeared in the Daily FT of which the heading was ‘Bangladesh became a lender for first time thanks to SL’. This news item took me to my banking career of 1970/80s, which reminded me of the credit norms that we were practicing in the bank, as credit officers when a customer requested for a credit facility or a loan.
On receipt of the loan application, we evaluated the financial healthiness of the borrower to ensure whether the borrower possessed a sound repayment capacity. Then we weighed up the borrowing records through various sources available, to ensure whether he was a defaulted borrower and was he in a position to financially breathe well irrespective of unaffordable debt burden.
If response for those two were positive, then we sought for any security which in case to be used to recover the loan if the loan was not repaid as expected due to the reasons beyond the control of the borrower.
If the repayment capacity is not sound or if it proved that the borrower was not in a position to repay the loan, irrespective of the security he offered we refused to grant the loan. In case the repayment capacity was sound but his past borrowing records were not satisfactory or he was reported as a defaulted borrower, we directly refused to grant the loan unless he proved satisfactory arrangements that he had made with those creditors to repay those defaulted loans. Security was not considered as vital to grant the loan if those factors mentioned above were not satisfactory.
When the bank refused a loan based on the above norms, the borrower has a propensity to look for the assistance of ‘Private Money Lenders’ (PML) at an exorbitant interest rate. When the borrower is unable to repay the loan with a normal rate of interest, how he pays at an exorbitant rate was not a matter to PML since such lenders used unethical ways to recover the loan.
As reported in the above news item, Bangladesh grants this loan of $ 200 million to our country from its foreign reserves and this is the first time that Bangladesh is going to make such an investment in a country through a currency swap deal. I do hope the lender Bangladesh should have definitely evaluated the repayment capacity of the borrower that is Sri Lanka and its past and present borrowing records. In order to assess the repayment capacity, the lender would have used the global ratings.
S&P a world’s rating agency has cut Sri Lanka’s long-term foreign currency credit rating to ‘CCC+ from B-’ for 2020, which exposed the risk of default. Another global rating agency Moody also downgraded Sri Lanka’s credit ratings to ‘Caa1 from B2’ in September last year. No doubt this fragile situation of Sri Lanka would have now significantly weakened, as consequence to the present rapid outbreak of COVID-19.
Further it is reported that Bangladesh is going to grant this loan deviating its Internal Treasury Investment Guidelines since the borrower does not comply with the standard rating requirements.
As I stated above, if the borrower does not possess a sound repayment capacity and the borrower’s past and present borrowing records are very bad, no lender will choose such a borrower to grant a loan involving an intolerable high risk. Knowing well that Sri Lanka is a debt-ridden country and presently the repayment capacity is not sound, with no way of repaying the said loan without new borrowings, one would wonder what made the Bangladesh Central Bank (BCB) opt for this loan even deviating from its own Internal Treasury Investment Guideline as the borrowing country does not comply with the standard rating requirement.
Has Sri Lanka offered any valuable security to moderate the high risk? As reported, the agreed security was ‘to exchange our currency with Bangladesh Bank equivalent to the amount of dollars they will be given and the Guarantee of SL Government’. It seems the borrower’s guarantee has been taken as security to secure a high-risk loan granted to the same borrower violating their own (BCB) guidelines.
However, it appears one plus point for the lender (BCB). That was the high rate of interest applied.
The BCB will grant this facility at 2% interest, which is higher than other current global rates. However, charging a comparatively higher rate of interest will pose another issue. A borrower who shows a poor repayment capacity to pay a loan with a lower rate of interest (market rate), how can he pay such a loan when the interest was increased?
As reported this facility will be for one year during which the fund will be provided. After getting the fund, Sri Lanka will have to repay it by three months. Does the BCB anticipate that Sri Lanka would be in a position to re-pay this within three months from the date of grant?
The history of Sri Lanka is intertwined with the history of the broader Indian subcontinent. The historical period begins roughly in the 3rd century, based on Pali chronicles like the Mahawansa, Deepawansa, and the Choolavansa. The first Sri Lankan ruler of the Anuradhapura Kingdom was Pandukabhaya is recorded for the 4th century BCE.
From the 16th century, some coastal areas of the country were also controlled by the Portuguese, Dutch and British.
The ancient Romans called Sri Lanka ‘Taprobane,’ while Arab sailors knew it as ‘Serendib.’ Then we have been named as ‘Ceylon’ and then Sri Lanka.
Independence was finally gifted in 1948 but the country remained a dominion of the British Empire until 1972. In 1972 Sri Lanka assumed the status of a Republic. A Constitution was introduced in 1978 which made the Executive President, the head of state.
Such a country with such proud history is today looking for financial assistance from the country, Bangladesh.
The borders of modern Bangladesh were established with the separation of Bengal and India in August 1947. Proclamation of Bangladeshi independence in March 1971 led to the nine-month-long Bangladesh Liberation War that culminated with East Pakistan emerging as the People’s Republic of Bangladesh. After independence, Bangladesh also endured famine, natural disasters and widespread poverty, as well as political turmoil and military coups. The restoration of democracy in 1991 has been followed by relative calm and rapid economic progress.
Within such a short period Bangladesh courageously came to the present position to grant a credit facility of $ 200 million to a country which had the proudest history and abundant natural resources. Who brought Bangladesh to this emerging situation? No one else other than the inspirational leaders who loved the country while ruling the country during a very short period of five decades. We had a period that foreign leaders who visited our country have been inspired and wanted to be like us. But where are we today?
Most of the people in our country view this borrowing, as a nature sarcasm caused due to robbing the State funds by those who ruled the country since independence.
The expectation was not to underestimate the emerging Bangladesh but to highlight the weaknesses of our past and present leaders who were not matured and didn’t have required revolutionary strength and visionary forward look to lead our beautiful country despite all the resources gifted by nature. It is not only one leader or one party that ruled this country who is responsible. But all those who ruled or rather ruined the country since independence is responsible for this heartbreaking situation. With greatest reluctance we have to accept without any iota of doubt, all those who ruled this country are individually and collectively responsible. We pray for a better Sri Lanka although no visionary leaders are at least to be imagined.
(The writer is a former banker. He is an Associate of the Institute of Bankers and a
Fellow of the Institute of Credit Management Sri Lanka and currently serves as a visiting (online) lecturer of the Institute of Credit Management, Sri Lanka. He could be reached via wimaleb@gmail.com.)
