Sri Lanka’s proposed consolidation of the financial sector is likely to result in a reduction in the number of employees in the banking sector with the consolidation process likely to cause distress to the existing banking sector employees, a recent report by a stock brokerage firm has highlighted. According to a Banking Sector Review of 2013 published by Asia Securities Research, the guidelines on staff retrenchments provided by the Central Bank of Sri Lanka in the process of the proposed consolidation poses a challenge given that the consent of the employees is required before proceeding with staff reductions.
“Under this backdrop the existing volume of banking sector jobs could shrink given that the process is an industry wide phenomenon and laid off staff could not be easily absorbed by other sectors of the economy. Hence, the consolidation process may cause distress to the existing banking sector employees,” the review by the investment firm released last week stated.
On the other hand, the report noted that since it is stipulated by the monetary authority that the terms of deposits are not liable to change in the case of a merger between a commercial bank and a non-banking financial institution this particular clause could constrain a merger between a bank and a Non Bank Financial Institution (NBFI) given that banking institutions will not be keen on paying higher interest rates offered by the NBFIs to depositors, hence, limiting the mergers within the sphere of operation of each firm.
However, pointing out the positive impact of consolidation, the report said the reduction in the number of banks through the consolidation process will reduce the volume of expenses spent by the banking sector specifically on advertising and inter firm competition in general.
“This, in turn, reduces the waste of loanable/investable funds and savings of depositors due to excessive competition among individual banks. Hence, the measure would reduce aggregate operating costs of the sector as a whole enabling the banks to lower their interest margin without deteriorating the Net Interest Income or other profitability ratios. The reduction in sales and promotion costs as a result of reduced degree of inter-firm competition would also proportionately increase the loanable funds of the financial system and hence may have a favorable impact on interest rates and economic growth,” the report elaborated.
It further added that a similar impact can be expected on the financial system in particular and on the economy in general by the possible reduction in overall operating costs including overhead costs accruing to premises, staff, equipment and other related cost categories of the banking sector following the consolidation process.
Following the consolidation process of the banking sector, the Central Bank expects that at least five Sri Lankan banks will have assets of Rs.1 trillion or more, with such banks also having a strong regional presence and the economy to have a large Development Bank that will provide a substantial impetus to development banking activities in the country.
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