Banks directed to double capital to Rs.20 bln
View(s):Commercial banks are to be directed to double their capital to Rs. 20 billion to manage possible financial crises and act as a buffer against financial problems. The Central Bank (CB) is to issue a directive to commercial banks shortly with capital increase guidelines with the rule in place by December 31, 2017, CB sources said. This decision was taken at a recent meeting of the Cabinet Committee on Economic Management (CCEM) chaired by Prime Minister Ranil Wickremesinghe, to ensure the overall goal of financial system stability while maintaining bigger banks instead of many smaller banks, the sources disclosed.
Sufficient capital and other buffers will be put in place to ensure the Sri Lankan financial sector is able to resist adverse business cycles and liquidity constraints, without sacrificing investment potential during periods of global economic downturn. A spokesman of the Sri Lanka Banks’ Association told the Business Times that the government will encourage the voluntary mergers of banks that will result in stronger balance sheets. However state coffers will have to inject billions of rupees to state-owned banks to meet the increased capital requirements, a Treasury official said.
But it will not be an easy task due to current financial constraints of the Treasury; he said adding that the need for additional capital will exert pressure on private sector commercial banks as raising equity by those banks will be more challenging for them than for state banks. Commercial banks have also been asked to diversify lending portfolios as most are confined to collateral-based lending and have shown a marked reluctance to engage in ‘business model’- based lending, CB sources disclosed. According to a decision taken by the CCEM the banks’ lending portfolios are to be controlled by the CB.
Accordingly, all the banks should lend at least 15 per cent of their loan portfolio to agriculture and state institutions, 10 per cent to SME and tourism, 8 per cent to women, 5 per cent to youth, and 3 per cent to export oriented projects. Total lending per customer under these categories has been limited to a maximum of Rs. 30 million. All commercial banks have agreed to work together and join the National Payment Platform (NPP) by the end of this month to handle online payments as part of government efforts to encourage digital transactions. The NPP is being developed by the Communication Technology Agency (ICTA).