The DFCC Bank has summoned an extraordinary meeting on August 28 to obtain shareholder approval for amalgamating the DFCC with the DFCC Vardhana Bank (DVB) which is its commercial banking unit.
The amalgamation proposal document says that the DFCC currently owns 99.17% of DVB and had at the time of its initial investment in DVB, obtained the approval of the Central Bank for operational management of that entity.
Earlier the DFCC and NDB were in talks to examine amalgamating the two banks. But these plans were abandoned following the change of regime last January.
"Accordingly, all service functions except for the finance functions are currently managed on a group basis. Further, corporate and lending functions are also managed on a group basis," the document said. "Retail lending and other related business activities are handled at DVB on a stand-alone basis. Foreign exchange transactions on behalf of customers are only undertaken by DVB."
"However, the Boards of DFCC and DVB are of the view that the full synergistic potential of the two entities had not yet been realized due to factors such as the existence of two legal entities, two categories of staff and two versions of the core banking system.
Also, regulatory changes in the last few years and anticipated regulatory developments are also factors that affect the continuation of the current model of continuing as two separate legal entities. The amalgamation is expected to realize all the remaining synergies by becoming one legal homogeneous entity, DFCC said.
The DFCC will continue its development financing business following the amalgamation when it will become a licensed commercial bank. Given its development banking expertise and skills accumulated over 60 years, it plans to further expand this business, shareholders have been told.
The document says that while DFCC as a specialized bank markets a narrow range of products, vis-a-vis commercial banking, it particularly focused on project lending which DVB does not focus on.
"Business units of the amalgamated bank will be able to market a fuller range of products, which will bring in improvements in cross-selling of products leading to a higher share of wallet of the customers," the document said.
Other improvements anticipated include staff related efficiencies, system related efficiencies, institutional strength, higher branch banking efficiencies and tax efficiencies.
DFCC has told its shareholders that it currently enjoys three regulatory benefits as a licensed specialized bank. These are not having to maintain statutory reserves on fixed deposits, not having to maintain liquid assets on its term borrowings and not being subject to net open position on foreign currency exposures arising from credit line borrowings.
"A licensed commercial bank does not enjoy these benefits and as such DFCC will lose these benefits with the proposed amalgamation," the document said. "However, the merged bank can expect to be assigned a higher net open position which will enable it to undertake larger value foreign exchange transactions on behalf of its customers than can be presently undertaken by the stand-alone DVB."
DFCC has requested the Central Bank to continue these benefits at least for a limited period. It said that in the long term, it will be able to develop a low cost current and savings deposit base and bring down its cost of funds to a more competitive level.
"There is a reasonable expectation based on precedent that the merged entity will be granted time to fully comply with regulations applicable to a licensed regular bank," DFCC said.
The Bank of Ceylon with 14.35 % of the DFCC Bank is its biggest single shareholder, followed by HNB (12.22%), Life Fund of the Sri Lanka Insurance Corporation (10%), EPF (9.19%), Mr. M.A Yaseen (7.26%) and Melstacorp (6.43%).
The amalgamation proposal document said that the DFCC has already sought approval for the appointment of an additional non-executive director from the Central Bank and approval is pending. It further said that it intends to seek Central Bank approval after the amalgamation for a serving independent director and the current executive director of DVB to be appointed to the DFCC Board.
The DFCC Board now comprises Messrs C.R. Jansz (Chairman - non executive), Arjun Fernando (CEO/executive), K.D.N Ranjith Asoka (non-executive, Treasury representative), Ananda Atukorale (non-executive) , K.P. Cooray (non-executive), T. Dharmarajah (non-executive), Mayura Fernando (non-executive) Ms. V.J. Senaratne (non-executive) and Ms. Shibani Thambiayah (non-executive).
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