Financial consolidation ensures sectoral stability, say sector experts
Sri Lanka is poised to gain increased confidence from the external markets in doing business due to a stronger banking and finance sector in the wake of the consolidation process underway.
“When outsiders see a strong banking system they will be more confident of doing business with us,” NDB Chairman Sunil Wijesinha told the Business Times on Friday in relation to the current consolidation process. NDB Bank is currently on a consolidation drive with the DFCC Bank for which the appointment of a consultant, the Boston Consultancy Group (India) was announced on Thursday to the market.
In view of the current fast growing economy a strong banking and finance sector is required to support it, he noted adding that in this respect, the authorities should be commended for this move.
Mr. Wijesinha explained that following the recession in the West the external sector faced issues when trading with Sri Lanka since they found the banks to be weak and were impacted due to the credit squeeze.
In this respect, he pointed out that the banking system was really restricted clearly highlighting that this sector was critical to the economy.
With Sri Lanka taking on larger infrastructure projects, the consolidation of the two development banks in the country would ensure that they would be capable of handling a big customer, Mr. Wijesinha said.
Moreover, NDB would continue to strongly focus on the SMEs and the rural economy that would be assisted through the expertise and financial strength gained.
The NDB Chairman also believed that due to the failure of certain finance companies especially the smaller entities failing, consolidation was imperative since the bigger entities possessed better systems, adopted risk management techniques, increased investment in IT and with a highly qualified and professional management expertise that could be shared with the sector.
A smaller entity engaging in the amalgamation process, announced to the market, is Indra Finance and Commercial Bank.
Indra Finance CEO Saliya Rajakaruna commended this drive and believed it would mostly hold good for the smaller entities that were facing issues like increasing Non Performing Loans (NPLs) and declining Return on Equity (ROEs) and Return on Assets (ROA).He noted that a possible future disaster could be overcome since the decline in returns would ensure that the company take some kind of action. Added to this intense competition in the market was expected to instil more insecurity within the smaller entities against the larger ones.
Mr. Rajakaruna said the consolidation process would bring about large entities into the market that would be price givers and in the face of this a small company would not be able to survive. He pointed out that there were currently about 60 finance companies present in the market.Commenting on their consolidation with Commercial Bank, he said Indra Finance would bring with it its own background of being part of the dominant vehicle seller in the market Indra Traders.
When combined, Mr. Rajakaruna explained there would be a very large provider of finance and vehicles to the market.
In addition, Indra Finance would be looking at investing in the heavy industry segment with future changes expected in terms of management and ideas. He also noted that the good capital ratios would impact positively on the finance company.