According to the finance ministry data, Lankaputhra Development Bank had 1,146 million rupees of bad loans and a 46.7 percent non-performing loan ratio.
Lasantha Gunewardene, appointed Chairman of Lankaputhra Bank in February 2015, said bad loans were now at 1.5 billion rupees.
Gunewardene said loans had been given under political direction under the last regime to politically connected borrowers who did not fulfil the bank's own credit rules.
He charged that a number of loans had been apparently given knowing that they will never be paid back.
In one case a businessman had been called to the office of a minister and given a cheque for 100 million rupees. Gunewardene said when they tried to collect the loan, he had expressed surprise and said he was told the money would not have to be paid back.
In another case, the bank had been asked to pay 'special attention' to the loan application of a politically connected businessman who had been denied a loan.
Several other large loans ranging from 200 million to 300 million which had been given either on the instructions of the Treasury or the Presidential Secretariat had gone bad, Gunewardene said.
He said an internal audit had revealed that many borrowers had been given loans on forged documents and fake collateral.
A loan had been given on 'precious stones' with a valuation report from a gem authority given as collateral to the bank, but only worthless quartz stones were found in the safe, Gunewardene said.
A loan had been given on a deed, which was found to be a temple, he said.
Gunewardene was responding to a charge that Finance Minister Ravi Karunanayake had given a list of borrowers to Lankaputhra Bank, with instructions to give loans to them.
He said no such instructions had been given. The policy direction had been issued to give loans on proper collateral, Gunewardene said.
Sri Lanka's state banks have been used by the elected ruling class for directed lending for several decades, especially during the 1980s and 1990s.
The Bank of Ceylon and People's Bank have been bailed out twice with tens of billions of rupees of public money.
But in the late 1990s and early 2000s the Chandrika Kumaratunga administration and the subsequent Ranil Wickramasinghe administration tightened credit standards and governance at the two large state banks, leading to calls for new 'development' banks.
Sri Lanka's post 2004 administrations built two banks, SME Bank and Lankaputhra Bank which promptly attracted bad borrowers.
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