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Lankan banks to be treated separately in debt restructuring

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Sri Lankan banks are to be treated separately from international creditors in the restructuring of debt. Domestic debt is to be considered as already having been restructured. The foreign creditors have acknowledged the need for banking sector stability even in their interests of being repaid. Accounting and regulatory forbearance have largely been tacitly agreed upon following the restructuring.

Commercial Bank Chief Executive Sanath Manatunge said, “There are various permutations and combinations in reprofiling the debt. We must bear in mind that the banking sector is important for the revival.”

Manatunge was speaking to Echelon Magazine in the January issue on ‘Restructuring Debt, Dud Loans, and Regulatory Forbearance: Bankers on Dealing with the Crisis’.

Domestic debt is to be considered already restructured as the holders of that security have already faced considerable losses through exchange rate depreciation, inflation, and the imputation of additional taxes on the asset class. Due to banking secrecy, the treatment of individual creditors shall not be disclosed publicly. The legality of debt restructuring is an international grey area.

Manatunge concerning the International Sovereign Bonds that are to be restructured said, “The treatment should not be the same for Sri Lankan banks. Sri Lankan bank capital adequacy is under stress. Our ability to absorb a haircut is limited. One possible option is for banks holding ISBs to be given a tradable bond to cover the impact of the haircut.”

Noting this was not the only way the banking sector could be compensated for the haircut he later added, “There are six or seven other such solutions to the creditors.”

Manatunge noted that there would not be a day-one adjustment to the accounts of the banking sector as and when the debt reprofiling is publicly announced. He said, “The day one adjustment should come with some regulator forbearance, the banking sector will not be able to absorb this adjustment.”

Manatunge further alluded to the separate treatment with capital adequacy changes. He said, “We are getting compensated by another instrument, which is an asset. So the haircut will be reduced by a similar amount.”

Manatunge noted the strength and guile of Sri Lankan negotiations in this debt restructuring. He said, “We have the strength to say no when creditors propose conditions that are unsuitable for the economy.”

Manatunge called for a shared vision in the restructuring. He said, “I believe this is a man-made disaster. We have all the resources we need. We need the vision and commitment to make it a reality.”

Concerning the date of the ISB restructuring, People’s Bank GM Ranjith Kodituwakku said, “ISB restructuring in Q2 2023 will be the target.”

The IMF has in this instance never intervened in local debt restructuring. Any domestic debt restructuring or reprofiling is mostly up to the central bank, the government, and banks.”

Kodituwakku further added that as was the case in the US during the financial crisis the Central Bank was formulating a mechanism to absorb the bad assets of the banking sector. He said, “A bad bank has been mooted. It should aim to revive industries and not liquidate companies. The idea could be a move forward to take charge of stressed assets for some time.” TP

Monday, January 23, 2023 – 01:00

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