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Better
governance The banking sector is heavily concentrated in the import/export sector which accounts for 37 percent while the respective shares of agriculture and industry, at five percent and 10 percent, could be considered low. A significant aspect of the revised policy is the removal of the US$2 million requirement for foreign banks thus bringing them on par with the local banks. This is a major move to create a level playing field, and the foreign banks too will have to concentrate on strengthening the local balance sheets despite the strong overseas parentage. However, it is left to be seen what the policy of the foreign banks will be to infuse further capital in a economy that's struggling to reach its full potential. The immediate future will pose many challenges for the banks and it is premature at this stage to forecast the scenarios. Nevertheless, mergers and acquisitions will be considered options whilst raising capital through public issues too will add further momentum to the economic activities. The bigger banks are likely to be unaffected but the smaller banks will obviously be under pressure and need to come up with innovative strategies. Twenty two banks for a population of 19 million in comparative terms seemed an "over-banked" scenario leading to waste of resources and low productivity. The Central Bank is justifiably hopeful that the new measures in minimum capital requirements will encourage the much needed consolidation of existing banks to provide adequate protection for depositors' funds and provide the strength to absorb internal and external shocks. Similar measures have taken place in the developed world to rationalise the banking sector to fewer but stronger groups, UK (4), Australia (4), and Singapore (3) are proven examples. In the newly industrialised Malaysia a merger programme to create six financial groups was launched in 2000 following the 1980s recession and the 1990s economic crisis. Tax incentives had been offered to encourage the process. In Indonesia, Thailand and South Korea, the IMF pursued a forced programme of consolidation. Consolidation through mergers is a global practice to achieve higher productivity and economies of scale, and particularly in the financial sector, it's a mechanism to face up to external onslaughts from globalisation challenges. The banking industry has been revolutionized with the advancement of information technology and specialized functions such as treasury management. Very recently global giant Unilever tied up with HSBC for treasury operations. Today customer expectations in banking well surpass the traditional borrowing/lending activity. In Sri Lanka too rapid developments of product innovations and differentiation mostly based on non-cash models have emerged. These include credit/debit cards, ATMs, Internet/Tele banking, cash management systems and e-channeling. These activities necessitate very high investment in IT and equally high skill levels, which obviously need a strong capital base. The Central Bank is optimistic that the new policy leading to consolidation would encourage the entry of strong, competitive banks in the future. Consolidation and strengthening of the banking sector should pave way for further advancements to satisfy customer demands. Undoubtedly a strong banking sector with an equally effective regulatory system provides a conducive environment to enhance the confidence of the community in the banking system. (The writer could be reached at - suvink@eureka.lk) |
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