Be that as it may, one phrase repeatedly surfaced during the recent proceedings before Parliament’s Committee on Public Finance (COPF) while discussing the now infamous Rs. 13.2 billion exposure disclosed by NDB Bank.
“Prudential supervision.”
At first hearing, the phrase sounds reassuring. Technical. Professional. Regulatory. It creates the impression of a sophisticated framework where experienced banking supervisors continuously monitor financial institutions to identify weaknesses before they become catastrophes.
But once one actually examines what prudential supervision is supposed to mean in practice, the phrase becomes deeply uncomfortable for the Central Bank of Sri Lanka itself.
Because prudential supervision does not mean waiting until a bank publicly discloses a crisis before noticing there was one.
It means identifying abnormal risks before they become systemic exposures.
That is the entire point.
A prudential regulator is not merely a passive observer of quarterly explanations submitted by banks. It is supposed to function as an active early-warning mechanism protecting depositors, shareholders and ultimately the financial system itself.
The word “prudential” comes from prudence – caution, vigilance and risk anticipation. In banking supervision, it refers to a regulatory philosophy built around identifying warning signs early enough to prevent institutional instability.
And that is precisely why the developments surrounding NDB are now raising increasingly serious questions about whether the Banking Supervision Unit of the Central Bank failed in its most fundamental responsibility.
Because according to discussions before COPF, the Central Bank had reportedly queried the unusually large balances sitting within what was described as a “suspense account” linked to pending CEFT transactions.
Yet despite the balances reportedly growing quarter after quarter – from around Rs. 1.4 billion eventually toward approximately Rs. 12.2 billion reflected under “Other Financial Assets” in the bank’s Annual Report – the supervisory response appears, at least publicly, to have remained largely limited to accepting explanations provided by the bank itself.
And that is where the phrase “prudential supervision” begins collapsing under its own meaning.
Because prudential supervision is not supposed to operate on blind acceptance.
It is supposed to operate on scepticism.
When unusually large balances continue escalating inside a licensed commercial bank, prudential oversight is expected to ask difficult questions:
Why is this balance growing?
Why is reconciliation delayed?
What controls are failing?
What operational risks exist?
What governance weaknesses are emerging? Does this require deeper inspection?
Does it threaten the institution’s safety and soundness?
One does not need proof of fraud before prudential intervention becomes necessary.
That distinction is absolutely critical.
A criminal investigator requires evidence capable of supporting prosecution.
A prudential regulator requires sufficient concern to justify intervention.
Those are entirely different thresholds.
And perhaps that is why the discussions before COPF appeared unusually sharp. Members of Parliament including former Finance Minister Ravi Karunanayake openly questioned how such balances could allegedly continue growing over several months while supervisory systems failed to escalate concerns more aggressively.
Questions were also raised regarding reporting structures themselves, with indications that supervision largely operated through monthly reporting cycles rather than real-time monitoring mechanisms capable of identifying rapidly escalating anomalies.
That issue alone is alarming.
Modern banking frauds do not always announce themselves dramatically. They often evolve gradually through operational anomalies, reconciliation irregularities, unusual asset movements and balances that stop making commercial sense long before anyone formally labels them “fraud.”
And that is precisely where prudential supervision is supposed to function.
Not after the collapse. Before it.
The deeper problem now confronting the Central Bank is therefore not merely whether fraud occurred inside NDB. The deeper issue is whether the supervisory philosophy itself became excessively procedural rather than genuinely investigative.
Because if supervision simply consists of asking banks for explanations and then accepting those explanations despite escalating anomalies, the entire purpose of prudential regulation begins weakening.
That is especially troubling when one considers that licensed banks pay enormous sums precisely to operate within a supervised regulatory environment. As raised before COPF, banks reportedly contribute tens of millions of rupees toward the very supervisory architecture now being questioned.
Which inevitably leads to a blunt public question:
If the regulators were not capable of aggressively interrogating a balance reportedly growing from approximately Rs. 1.4 billion toward Rs. 13.2 billion over time, then what exactly was the prudential supervision protecting?
Because the issue is no longer merely one bank.
It is confidence in the system itself.
And banking systems survive not merely on liquidity and capital.
They survive on trust that someone competent, sceptical and independent is watching the numbers before the numbers become disasters.
That, after all, is what prudential supervision is supposed to mean.
