"DFCC – NDB merger will reduce competition in long-term lending’’

Eran warns that it will cost borrowers

UNP National List MP Eran Wickramaratne and former CEO of the NDB in a parliamentary speech last week said that the intended merger between the NDB and DFCC will reduce competition on long-term lending and make the industrialist and borrower poorer by reducing competition.

"The merger will only increase government intervention in well run institutions," he said. "A merger should create synergy. One plus one must add to three."

Wickramaratne urged that it would be logical for merger partners to be dissimilar, bringing different strengths to the merger. He strongly urged that the decision as to which banks or finance companies should merge should not be determined by the Central Bank or any other authority but by the institution and its shareholders.

At the inception of his speech, Wickramaratne pointed out that during his recent budget speech the Finance Minister had indicated that the financial industry needed to be consolidated and the Central Bank has now presented a Master Plan on consolidation of the financial sector.

He questioned the Central Bank driven Master Plan expressing the view that there was a developing financial crisis and the Central Bank was attempting to respond to it with its directed consolidation.

"Why has the Central Bank issued so many finance company licenses since 2006," he asked, "and one as late as 2013?"

He accused the Central Bank of inconsistent behavior by proliferating licenses and then wanting to consolidate. The MP agreed on the principle of consolidation saying that he has long advocated this measure but questioned the Central Bank’s motive behind the present move.

Wickramaratne expressed the view that the government must create the legal and fiscal incentives to drive consolidation but leave the decision on mergers and acquisitions to the respective institutions, its shareholders, directors and senior management.

"You cannot transfer your problem with troubled finance companies to well run banks or finance companies. If the Central Bank failed in its regulation then the tax payer will have to bear the cost," he said.

Wickramaratne expressed the view that the banking sector was strong, resilient, well capitalized and profitable and said that any intervention by the Central Bank and bureaucrats in the strategy and operation of these institutions will be detrimental.

"You will weaken strong industries over time," he said. "Ten years from now these mistakes will unravel."

He said that in 2009 eight finance companies had liquidity and financial problems and last year CIFL had run into trouble. There is evidence that the Central Bank had known of the problems of CIFL but had been silent about it for unknown reasons.

"The poor supervision by the Central Bank has made depositors poorer and made them lose confidence in the finance company sector. The depositors of Golden Key, CIFL and others are still living in hope that their hard earned savings will be returned."

He also said that there was a fear raised that the Central Bank’s direct involvement may result in further government control of banks and finance companies.

Wickramaratne estimated that the Bank of Ceylon, People’s Bank, NSB, Commercial Bank and HNB account for about 66.3% of banking assets with Sampath, Seylan, NDB and NTB accounting for a further 15.5%.

"Even the private banks are under heavy government influence," he said citing as an example that about 24% of HNB’s lending is to state owned enterprises.

He urged that there must be a strict separation of powers between the Board of Directors and management of banks and said that it has been reported that in one of the largest private banks, the Chairperson is involved in management meetings.

The MP said that he was refraining from naming individuals at this stage but asked why the Central Bank was not enforcing the Code of Governance.

Wickramaratne warned that in the context of the scandals on the Stock Market and the transfer of wealth into the hands of a few cronies, there was danger that the finance companies also could end up in the hands of such cronies.

"There has been a colossal transfer of wealth from many smallholders and funds such as the EPF and the ETF into the hands of a few over the past two years," he said. "Two SEC Chairpersons were unable to prevent such a transfer of wealth and were forced out of office. So there has to be great vigilance on the Central Bank sponsored consolidation plan."

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