By Duruthu Edirimuni Chandrasekera
Since there has not been any significant crisis situation in Sri Lanka’s financial system except for some non-systemic failures of a few mismanaged financial institutions in the recent past, the question raised by many local and international agencies was why the Central Bank (CB) came up with a financial sector consolidation programme for a well-functioning stable financial system, set the stage for CB’s 64th Anniversary oration titled “Financial Sector Consolidation: Why and How?” held recently.
Past global experiences show that all the consolidation programmes implemented to stabilise those economies’ financial systems were introduced as a national policy in response to a crisis situation, C. J.P. Siriwardene, Assistant Governor CB delivering the oration said, adding that Sri Lanka’s drive beyond 2016 will largely depend on the strengh and the dynamism of the financial sector.
Some financial institutions have failed due to their inability to adapt to the rapidly changing economic conditions. Small financial institutions not complying with corporate governance principles, capital and liquidity requirements were also a reason for some past crises, which have resulted in exerting pressure on the stability of the financial system of the country, Mr. Siriwardene said.
Serious distress
During 1988-90, 13 Licensed Finance Companies reported serious distress, of which two companies were revived by infusing new capital while 11 companies were liquidated. A specialised bank Pramuka Bank failed in 2002. It was only in 2007 that the deposits of the Pramuka Bank were transferred to a new Savings Bank. “In 2009, eight financial institutions faced liquidity problems, mainly due to the collapse of the parent company of a particular group,” Mr. Siriwardene said, adding that most of those financial institutions are still undergoing restructuring. CB had studied several consolidation models of other countries, to fashion consolidation in an effective manner. “In Asia, following the Asian financial crisis, many countries consolidated their financial institutions successfully,” Mr. Siriwardena said. Amongst them Malaysia, Thailand and Singapore were prominent.
As larger banks grow, it will be difficult for smaller banks to remain competitive, therefore, small banks will be induced to merge with stronger partners. “The outcome of the consolidation in the banking sector is expected to result in a sector where at least five Sri Lankan banks will have assets of over Rs. 1 trillion with a stronger regional presence by 2016, while domestic banks, which hold assets less than Rs.100 billion now will have to increase their asset base above Rs.100 billion through organic growth and merger/absorption by 2016.
The three banks with development banking focus in Sri Lanka, namely, the National Development Bank PLC, DFCC Bank and DFCC Vardana Bank Ltd., are still not as big as we would like them to be to cater to the current and future needs of the economy. Therefore, these three banks will be merged so that the resulting entity would be large enough to comfortably raise capital from international markets and cater to the growing demand for investments by both the private and public sectors.”
The two large state commercial banks, Bank of Ceylon and People’s Bank, are encouraged to operate with higher levels of capital and conduct private banking on a wider scale, Mr. Siriwardena said, adding they’re expected to strengthen their off-shore banking operations and grow and expand towards a stronger regional presence. “We have encouraged the National Savings Bank to broad-base their banking activities to contribute to the economy on a larger scale while, the Pradeshiya Sanwardhana Bank (the regional development bank of the country) is encouraged to serve the niche market of microfinance, targeting inclusive growth in the provinces.”
“Most of the banks and NBFIs submitted their respective confirmed merger proposals by 30 June 2014, while only a few financial institutions did not have firm plans due to certain reasons and were in need of additional time to finalise their respective plans. In order to resolve issues related to these banks and NBFIs, the second round of meetings, chaired by the Governor of the Central Bank, was held during 11-22 July 2014. At these meetings, matters relating to the delays in arranging mergers and acquisition were discussed and financial institutions were provided with appropriate guidance to manage the consolidation process. Accordingly, all NBFIs who had not confirmed their consolidation plans were requested to submit their final plans at their earliest,” Mr. Siriwardene said.
As of mid-September 2014, eight banks and 29 NBFIs have confirmed their merger and acquisition transactions under the consolidation programme while a few NBFIs are progressing under the restructuring process.
“We are now in the middle of the consolidation programme and the Central Bank intends to complete the programme by end March 2015.However, considering the complexity of the merger and acquisition models of some companies, some flexibility would be granted on a case by case basis to ensure smooth transition. After the successful completion of the consolidation programme, the Central Bank expects to work more closely with the financial institutions in order to maintain the right balance in the regulatory system”.
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