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The struggle for the soul of state banks Sri Lankan banks are in better financial health now than at any time in the past. While some risks loom like the possible rise in bad loans due to economic growth softening, impacts of higher capital requirements and inadequate internal capital generation, the long-term outlook appears bright. Sri Lanka’s low credit-to-GDP ratio of 30% suggests, should the economy, businesses and people prosper in the long term, bank lending can triple from its current levels. In 30 years, Sri Lanka’s bank credit-to-GDP ratio hasn’t risen by much. However, the last three decades are not a useful measure for how the economy is going to transform over the next decade. However, if the government allows state banks, which account for 43% of banking assets, to take a relaxed approach, two undesirable outcomes can be expected. Their controlling and deploying such a vast chunk of the sector’s assets based on government direction impairs competition and misallocates resources. A competitive banking system will reduce the cost of doing business across the economy. Even a 1% reduction on the nearly five trillion in bank credit across the economy will boost growth and make borrowers that much more competitive and better off. Now that state banks’ financial health is the best it’s ever been, an opportunity exists for meaningful reform.

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