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Most finance companies to be closed, some banks to merge
View(s):Sri Lanka is trimming the number of finance companies to 20 from 58 at the end of last year while smaller banks are to merge with bigger counterparts or be acquired under new rules which are however raising many questions. “There will be a reduced number of banks as a result of mergers and absorptions,” said
Central Bank Governor Ajith Nivard Cabraal during a comprehensive presentation on the ‘Master Plan to consolidation of the Financial Sector’ to bankers and heads of finance companies on Friday.
The opposition and banking analysts questioned the rationale of the move, as to whether there was any political agenda behind and the urgency in which it is being pursued. “Why is there a rush? There is no need to rush,” asked Opposition MP and economist Harsha de Silva, adding: “This (process) is like an urgent Bill in Parliament”.
Referring in particular to some troubled finance companies, he said the new rules pertaining to finance companies were “essentially to protect crooks” and vowed to not allow this to happen. “We will fight for depositors and ensure justice prevails,” he told the Sunday Times.While Friday’s discussions were off-limits to the media, the Governor’s presentation has been posted on the Central Bank website. He was disclosing more details of the master plan which was first revealed in the 2014 budget.
The Governor and his team were meeting heads of finance companies at separate meetings yesterday and today on the same issues.Highlights of his presentation include reducing the number of non-banking financial institutions (NBFIs – finance companies) to about 20 from a current 58 and strengthening at least five Sri Lankan banks to double their assets to Rs. 1 trillion from a current Rs. 500 billion.
A few finance companies have been grappling with crises in recent years stemming, initially, from the collapse of non-licensed Golden Key and its connected organisations in the then Ceylinco Group. Central Bank officials have said that at least 10 finance companies need new capital infusion while one is already under litigation.
Dr. de Silva said that while there were many unresolved issues in the finance sector, the authorities were bringing these changes and in doing so sweeping under the carpet the misdeeds and protecting criminals. In one instance the troubled Central Investments and Finance Ltd (CIFL) was officially labelled a Ponzi scheme, he said. “I tabled an April 28, 2011 confidential report in Parliament that was submitted to the Monetary Board by the Central Bank’s Director of the non-banking division which called CIFL a ponzi scheme. There were pages of irregularities and fraud by directors,” he said. But two months later (end June 2011) a ponzi scheme (CIFL) gets the all clear by the Central Bank and the Securities and Exchange Commission to seek public funds through the stock market, he added.
In his presentation, Mr. Cabraal said that of the 20 NBFIs, three would be specialised in micro finance. Each NBFI will have an asset base of more than Rs. 20 billion compared to the current status where just 10 have such assets while more than 40 NBFIs have less than Rs 8 billion in assets. No reference has been made so far, in the recent pronouncements about financial sector consolidation and mergers or about unregistered finance companies which are many in number. The Central Bank has warned depositors in the past against investing in these units as they do not come under any regulatory mechanism. Golden Key was one such institution.
The Governor also warned NBFIs and banks against forcible retrenchment or cutting jobs in the merger process, a concern that has been growing amongst bank workers since the December announcements.
“This merger/absorption process must not adversely affect the staff of the respective institutions. No staff member is to be forcibly retrenched as a result of these merger/absorption processes and no salary of any employee is to be reduced from that prevailing as at 31st December 2013,” he said.However, banking sector sources said the call was unrealistic as two units merging was purely for the purpose of building a stronger institution at lower costs. “Consolidation means if two people are doing the same job or there are two branches in the same area of both these institutions that would be reduced to one,” one banker said adding that the proposal as it now stands is just amalgamating the balance sheets while retaining all other aspects. Finance companies represent just 7 per cent of the financial sector with the rest taken up by banks.
Mr. Cabraal said small state-owned banks with assets less than Rs. 100 billion accounted for just 2.6 per cent of total assets of the banking sector. Twelve foreign banks account for only 10 per cent of market share although many have been in operation in Sri Lanka for decades. Among the bigger changes is the merger of the DFCC and NDB and the two managements are discussing this process towards establishing one strong development bank. However, analysts said the Government could face opposition in Parliament as DFCC has been set up under parliamentary statute and any amendment has to be approved by Parliament.
The Government has said the new developments are intended to strengthen the financial sector and build stronger banks that could raise capital overseas and help attract foreign investment.