Stop horsing around! – Cabraal tells banks to get their act together
Banks must do banking and not engage in lotteries, Central Bank (CB) Governor, Ajith Nivard Cabraal said, delivering the keynote address at the annual symposium for bank directors and CEOs on Wednesday, under the theme ‘Beyond a Rs. 10 trillion Banking Sctor’.
“They must leave it to the lotteries board and move towards serious banking,” he said, referring to the absurdity of ‘giveaways’ offered by banks to depositors.
He also called for business revival departments established at banks in a bid for creditors to have extra support to get their businesses back on track after a slump.
Highlighting the importance of connecting seamlessly to the real economy, he said, “We cannot diverse ourselves from the real economy. The financial sector survives because of the real economy. The real economy is given a boost because of the financial sector. Each one has an acute dependence on each other. We cannot talk about a US$ 100 billion economy without a sound financial sector.”
Mergers and acquisitions
Making a case for mergers and acquisitions (M&A) in local banks to enable a robust industry to attract foreign cash, Mr. Cabraal laid out some interesting statistics. “Sri Lanka currently has 21 banks and 58 finance companies. We have 11 banks in our country, which have assets of over Rs. 1 billion. Out of that four banks have assets over Rs. 500 billion, three banks have assets between Rs. 250 billion to Rs. 500 billion and four banks are between Rs. 100 billion and Rs. 250 billion, so altogether out of all our banks, 11 banks constitutes 89 per cent of our banking sector.” Currently Sri Lanka has only two banks in the world’s top 1,000 banks, ranked 979 with an asset base of US$ 8.4 billion and 983 with $4 billion, he said, adding that the five state banks account for 2.5 per cent of the total asset base, which is nearly 3 per cent from 10 foreign banks operating in the country. Of the 58 finance companies, 90 per cent are held by 28 companies.
He pointed out that smaller banks aren’t as interesting as big banks to an international entity (lending money). “So what is the type of banking sector we wish to see? (There should be) fewer (but large) strong banks, interest margin well below what we are seeing today and maybe still higher than international levels, at around 2 per cent,” he said, adding that several banks in the top 1,000 banks of the world have better governance, professional management, a reasonable regional presence, fully IT-enabled, new products and services. Highlighting the importance in takeovers of finance companies by banks, he said that similar consolidation happened constructively in foreign markets.
Consolidation of the financial sector would allow banks to attract international capital and give them the confidence to compete on an international scale, Mr. Cabraal emphasised, adding that this reduced interest rates which in turn would motivate banks to offer new products such as in pensions and annuities, super annuation and pension products to customers. The symposium saw panelists deliberate on ‘Building resilience in the Banking Sector; Changing role of a Bank Director; Insights to achieving Business Excellence; and, Expansion and Stability: a Balancing Act’.
C.J.P. Siriwardana, Assistant Governor CB presenting on ‘Building Resilience’ noted that the global financial landscape has changed considerably over the recent past. “Boundaries between banking and non bank sectors have been fading,” he said, adding that financial deregulation and liberalization has paved way for mergers and acquisitions, leading to the formation of institutions of a global scale.
The current crisis emphasized that we are now experiencing a single global financial system, he said, adding that the reform agenda to strengthen the global financial system took centre stage in the global arena.
“Building resilience of the Financial System in the face of rapid transformations is essential towards preserving Financial System Stability,” he said, stressing that Sri Lanka’s economy needs bigger and stronger banks. He said that even though being big does not ensure success, being a small bank is a definite significant handicap. “With the need for bigger and stronger banks, efforts to create such institutions through mergers and acquisitions (M&A) need to be stepped up to be able to perform the role that is expected of them in a fast growing economy.