Raising minimum cap for banks will benefit sector – Fitch
View(s):The proposed increase in the minimum capital requirements for Sri Lankan banks should help strengthen the capitalisation of some banks, says Fitch Rating.
It says this appears aimed at bringing about consolidation in the banking sector, which should raise systemic stability of the sector in the long term.
The budget proposal seeks to double the minimum capital of commercial banks to Rs. 20 billion while in the case of specialised banks it has been increased to Rs. 7.5 billion from Rs. 5 billion. Of the 15 domestic banks rated by Fitch, six did not meet this requirement based on reported core capital as at 1H16. Of these six, three do not even meet the existing, lower capital requirements.
“This underscores Fitch’s view that capitalisation in the sector needs to be shored up. Banks were initially expected to adhere to the current lower minimum capital requirement from 1 January 2016. However, the Central Bank granted extensions to some banks to meet this requirement by 1 January 2018 with specified interim targets,’ according to the Fitch media release.
Fitch is of the view that the reported capital adequacy ratios of banks in Sri Lanka continue to benefit from certain exposures that do not attract a capital allocation under local regulations. Fitch has long highlighted that capitalisation of major state banks is thin on an adjusted basis. Internal capital generation at these banks is constrained by dividends to the government and they are likely to continue to be dependent on the state for core capital infusions.
“Capitalisation of most nonstate banks has also been decreasing amid rapid credit expansion. The sector has not also raised much core capital through capital infusions from shareholders. Fitch believes banks could face challenges in raising capital, particularly as the operating conditions in Sri Lanka remain difficult, as signalled by Negative Outlook on the sovereign rating, which was downgraded to ‘B+’ from ‘BB’ in February 2016,” the release added.
A previous plan to bring about financial sector consolidation under the “Master Plan for the Consolidation of the Financial Sector” did not significantly reduce the number of banks.