Financial Times

NDB Group cautions high tax policies
The NDB Group, which reported increased pre-tax profits of 58%, up to Rs 2 billion last year from Rs 1.3 billion in 2004, said last week that the tax on banking profits was too high – in the group’s case 60% – and urged the authorities to reconsider the policy.

Group chairman S K Wickremesinghe, in a message to the shareholders contained in the bank’s 2005 financial year annual report, said the tax rate on the NDB Bank’s 2005 profits was 52%, but with the increases imposed in the 2006 budget on corporate tax from 30% to 35% and special VAT on banking profits from 15% to 20%, the overall tax rate for the Bank's profits will rise to over 60%.

“This is too high. The banking sector in Sri Lanka, taken as a whole, is troubled with a large pool of non-performing assets and their balance sheets need to be strengthened. Capital has to be found to meet the minimum regulatory requirements, for expenditure on information technology, for ensuring adequate returns to shareholders and to provide a better service to customers,” he said.

Among other challenges, “Sri Lankan banks must be competitive with regional and foreign banks. I would, therefore, urge the authorities to take another look at the tax policy applicable to the banking sector,” Mr Wickremesinghe said.

Some other local banks too have commented on the high tax rates on profits – raising the same issues on costs – and appealed to authorities to reconsider these excessive policies.

Post-tax profits, the bank group said, rose by 80% to Rs 1.4 billion against Rs 805 million in 2004. The bank’s own profits for the year were 52% above last year, while profit attributable to shareholders increased by 73% to Rs 1.2 billion from 2004.

NDB Bank’s Chief Executive Nihal Welikala said, in the report, that Sri Lanka is fortunate to be located in a region which is experiencing both unprecedented economic growth and the steady demolition of regional trade barriers and investment. Local banks have a real chance to compete in the huge markets on their doorstep, outside the narrow confines of Sri Lanka. However, this can be achieved only if banking standards can be raised to be competitive both regionally and globally.

He cited capital, competition and ownership as three specific drivers of structural change in the industry. Commenting on the greatly increased capital requirements which banks have to meet, Mr Welikala said that new equity capital will only be forthcoming if the return on shareholder funds meets shareholder expectations. Capital raising and equity returns are two sides of the same coin.

“IT-driven global and regional banks with economies of scale, supporting back offices in Chennai, and with low cost front offices in Sri Lanka are the new competition. Banks need to face the new realities of increased capital and regional competition. The present banking industry paradigm of high costs and high margins are at risk of being swept away by the winds of the globalised economy. They need to operate with lower margins, but higher returns, and to world-class standards, if they are to take on world-class competition at home and abroad,” he added.

On ownership and governance, Mr. Welikala pointed out that banks are different from any other commercial organisation in at least one crucial respect, they are mainly funded not by shareholders but by thousands of individual depositors who have nether the access to information nor the power or the voice to protect their own interests. “Banks and regulators, therefore, have an overriding, fiduciary responsibility to ensure that depositors’ rights are looked after, above all else.”

He said that especially after the 1997 East Asian banking crisis, regulators in most countries, including Sri Lanka, opted for a diversified ownership model backed by strong codes of governance and ethics for directors and management. It is how this policy decision is implemented that will determine, to a large extent, the future shape and direction of the banking industry in this country.

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