The 2016 Budget’s proposal to guarantee the deposits of all non-banking financial institutions (NBFIs) may have been poorly conceived, but will have limited effects on the banking sector, experts said at the CA Sri Lanka Budget Seminar.
“Saying there’s a guarantee is one thing. Backing that guarantee with the right sort of firepower is the second thing. So I don’t know whether anyone has done the calculations as to what is the potential impact the government may have to fund this particular guarantee,” NDB Bank CEO Rajendra Theagarajah said.
The Budget had outlined an authority to be set up under the Central Bank to monitor all NBFIs and provide a guarantee, making deposits at NBFIs akin to government securities.
“The finance companies have deposits of over Rs. 415 billion, whereas the Central Bank has Rs. 82 billion in capital, so it’s a mismatch,” Deputy Treasury Secretary S. R. Attygalle said.
However, he said that if the Central Bank does the proper job of monitoring all finance companies while rehabilitating the failing companies, the guarantee will not have to be implemented.
“Then only we can see, because somebody may ask, ‘When a company director plays with the money, why should the tax payer pay?’ That’s the question,” Attygalle said.
However, Theagarajah said that he opposes the move in principle, as it goes against the capitalist belief of the survival of the fittest.
“If you provide a blanket guarantee, how will you differentiate between an institution which is well-managed and stable due to good governance and a strong balance sheet, and those who will fall back on a third party guarantee?” Theagarajah questioned.
He noted that no country in the world provides such guarantees, with two exceptions being in Asia during the 1990s economic crisis.
Finance Minister Ravi Karunanayake had provided guarantees to NBFI deposits while at the same time banning banks from engaging in leasing activities, telling them to focus on their core businesses of loans and deposits.
Theagarajah said that since leasing makes up an average 6 percent of a bank’s loan book and banks have cornered just 10 percent of the leasing market, the ban will have minimal effects on banks, while they will also not have a mass exodus of deposits from banks to NBFIs.
“Local branches of foreign banks and are very well rated, which informs the investor to not just look at the fallbacks of a Central Bank guarantee. They will also look at the overall proposition, the relationship and what is the value they can get out of the relationship,” he said.
When a member of the audience pointed out that an average citizen may not look at such ratings, Theagarajah drew parallels within the banking system, where despite implicit Treasury guarantees on state sector banks, over 20 private and foreign banks have thrived with a near 50 percent deposit share. “So I’m not sure if there’ll be an effect. Then you have one segment, a small segment, that, however much the guarantees given by the govt, will always will be with the foreign banks. So there is cohabitation,” he said.
However, he reiterated that no one has yet comprehended the complexities of offering guarantees in the recent Budget.
Karunanayake seems to be ill-disposed towards banks, as he recently said that large taxes and restrictions were placed on the banking sector during the Budget since banks were making large profits even after the implementation of the Super Gain Tax. (CW)
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