In their own interest too, banks should be mindful of the uncertainties they create in the forex market which is not conducive to its smooth operations and, therefore, the perception by international markets and investors. As you are aware, worker remittance has financed around 69% of Sri Lanka’s trade deficit. There has been an increase in worker remittances in the recent past responding to active promotional campaign launched by CBSL with the support of the Sri Lanka Foreign Employment Bureau, overseas job agencies, foreign missions and the banks. Recently, the number of professionals and skilled worker categories were encouraged to take up foreign employment, which is catching up fast. Banks should make extra efforts to mobilize their remittances, as this will add to their fee-based income through enhanced financial services. The increase in remittances will have a beneficial impact in reducing the current account deficit and creating a greater stability in the foreign exchange market. Govt. securities market Commercial banks and a few non-banks are the primary dealers who buy and sell Govt. securities and create secondary transactions in this market. The Govt., tends to borrow from the debt securities market which is non inflationary. It appears that there are market collusion and cartel type operations which tend to drive returns on treasury bills and bonds to levels which are not in line with the current and expected movements in key macro variables. Often, CBSL has to reject bids because of the very high bidding rates quoted by primary dealers.
That means when there is excess liquidity in the system, borrowing from CBSL would add to enhancement of reserve money which will have multiple effects in expanding money supply and liquidity in the economy. Banks should make concerted efforts to adjust their funding sources to meet credit demands by mobilizing deposits and enhancing revenue through feebased activities. For emergencies, they should establish credit lines within their peers. Mobilization of deposits does not depend solely on high interest rates, but also on improved customer services and justifiable fees and charges. Similarly, banks should diversify business operations beyond core business of lending and that will help to reduce high credit risks. Improvements in efficiency to reduce intermediation costs Banks need to improve operational efficiency and reduce interest spreads and margins thereby reducing transaction costs to customers. High spreads and margins and related profits of banks and financial institutions will raise transaction costs to borrowers and investors who will pass such costs to customers through high prices of goods and services. This is inflationary. Compared to most countries in the region, banking and financial services in Sri Lanka are provided at very high margins. For example, India’s interest margin is 2.6% and Bangladesh is 2.5%. In Sri Lanka, it is 4%. In fact, even the big investors have begun to feel the impact of high transaction costs although many of them have the bargaining power to obtain funds at prime rates. The medium to small enterprises have no choice or access to finance.