Persuasive merging of financial institutions
View(s):Sri Lanka’s financial sector is expected to undergo a substantial transformation in the next two years with the proposed policy for financial consolidation through a persuasive merging, economists say. Some are of the view that this transformation initiative is positive, much needed and is in fact long overdue. Others take the view that a persuasive merging strategy may exert an undue interference with market forces, they said.
“Either way persuasive merging in the financial sector would make a long lasting impact (positive/negative/mixed) on the economy,” one economist said.
The Sri Lanka Economic Association (SLEA) has observed that an adequate dialogue has not been generated on the issue compared to its importance and impact. This is either due to lack of awareness or lack of interest or both.
In this context, the SLEA organised a public seminar on “Persuasive Merging of Financial Institutions and its Impact on the Economy” which was addressed by the five panellists representing the financial sector – C.J.P. Siriwardane, Assistant Governor of Central Bank; Dr. Chandana Aluthge, Senior Lecturer, University of Colombo; Aravinda Perera, Managing Director Sampath Bank; Nihal Fonseka, Senior Advisor to DFCC Board; Hafeez Rajudin, Managing Director, Arpico Finance and chaired by SLEA President Prof. A.D.V. De S. Indraratna.
It was discussed that the Sri Lankan economy is poised to reach upper middle income level by 2016 with an economy of the size of US$100 billion, an annual average growth rate of over 7 per cent, and a debt ratio of less than 65 per cent to GDP. The financial sector is highly fragmented; institutions are diverse; small institutions are unable to face challenges; involves a heavy cost to the economy. There is a need for a strong bank and financial sector which can finance the rising savings-investment gap through international borrowings. Banking and the financial sector must transform to face challenges created and avoid falling into the middle income trap, the seminar was informed.
After the expected mergers as targeted by the Central Bank (CB), there will be 10 non-banking financial institutions with a 65 per cent asset base in operation. The CB has laid down some conditions to bank and non bank institutions – no retrenchments or any salary revisions. The CB will provide matching facilities at concessionary terms to persuade for merging. “There is no regulatory pressure; it is not market driven; mere persuasion. The persuasive merging of financial institutions in essence is that,” one economist noted..
The panellists made rich presentations filled with facts and figures. They looked at the theme in several different dimensions.
Prof. Indraratna raised several pertinent questions regarding the proposed merging. The mergers, he said, on the one hand, would reduce competition and would give some oligopolistic power to banks and asked whether this would not enable them to increase the margin between their deposit and lending interest rates or would this not impact on private savings and private credit and thereby on economic growth?. Would not the merging also increase the regulatory power of the CB and its ability to enhance government lending thereby crowding out private credit? On the other hand, would not the merging increase the efficiency of the financial sector, reduce NPL and enable them to charge lower lending rates and increase deposit rates which would impact well on the economy? Prof.Indraratna also asked what impact the merging would have on the flow of FDI and the present domestic resource gap as a whole.
Panellists representing the banks and NBFIs saw the mergers in a positive sense. They said it would improve cost efficiency; capital adequacy; risk taking capacity.
However economists argue that mergers can take place due to different pressures and reasons. In the West it happens through market forces; in the East it has been largely regulatory driven. “It is interesting that in Sri Lanka it is persuasive. In Sri Lanka no CEO loses a job for poor performance. It is our culture. Size matters when it comes to providing better services and facing challenges before a middle income country. Transfer of technology bears a cost. It is common to any institution irrespective of the size. But if the institution is big the cost will be a smaller percentage and easily bearable,” an economist said.