Sri Lankan financial institutions need to keep up credit standards, improve risk and be well capitalised, while regulators must upgrade prudential and supervisory frameworks and be more vigilant in detecting risks and taking action to maintain stability; according to Central Bank Governor Ajith Cabraal.
In the introduction to the Central Bank's Financial System Stability Review (FSSR) report for 2010 released this week, a document which he described as being "the collective assessment of the financial system by the Financial System Stability Committee which is chaired by the Deputy Governor, in charge of financial system stability and is generally based on the performance of the financial sector during the first nine months of 2010"; he also advocated "enhancing the capacity of financial system to serve all sectors of the economy with an increased array of products" as well as developing a "vibrant capital market to supplement the banking sector."
Mr. Cabraal also noted that "[conditions] in domestic financial markets improved, as interest rates decreased with the decline in inflation and the easing of monetary policy. The overall soundness of Sri Lanka’s financial institutions was maintained with adequate capital and liquidity buffers and improvements in asset quality and earnings. The decline in interest rates and recovery in the domestic economy and international trade had a positive impact on risk levels in financial institutions."
He also added a "a new law for the regulation of finance business has been finalised to combat unauthorised deposit-taking entities and to upgrade the regulation of finance companies." While the "Banking Act is also being amended to enable consolidated supervision of banking groups and new provisions for mergers and acquisitions and bank resolution measures." Further, he alluded to an "early warning surveillance system" being designed to alert the Central Bank on actionable concerns which could "trigger a negative effect on the financial system."
Meanwhile, the report elaborated further on Mr. Cabraal's comments regarding domestic financial markets by revealing that these had also become more liquid, mostly as a result of increased capital inflows. Also noted was that the "banking sector recorded an increase in credit growth and remained financially strong and resilient with a high capital position and lower risk levels. Bank lending recovered and rose significantly in the first nine months of 2010 from negative growth in the previous year."
Additionally; "The finance and leasing company sector recorded significant growth in accommodations and earnings, owing to the better macroeconomic environment.
The financial soundness indicators of the two sectors, excluding the distressed companies, have shown an improvement. Directions on corporate governance and effective risk management systems have also been introduced. Measures were taken to restructure distressed companies (by bringing in strategic investors and converting a proportion of deposits into of shares) to enable them to continue business and repay depositors."
Speaking of other financial sectors, the report noted "[premium] income of the insurance company sector rose notably, while soundness improved with an increase in profitability and solvency ratios. The soundness of the primary dealer industry was maintained at a high level. The net asset value of the unit trust industry increased significantly bolstered by the upturn in the equity market."
Details were also given about the Central Bank-overseening "mandatory Deposit Insurance Scheme for Licensed Banks and Registered Finance Companies under the provisions of the Monetary Law Act." These included covering all "demand, time and savings deposits" and that "banks and finance companies will be required to insure their deposit liabilities with effect from October 2010." Further noted was that compensation will be paid by the Central Bank, up to a "maximum of Rs.200,000 per depositor per institution... within six months from the date of suspension or cancellation of the licence/registration of the institution by the Monetary Board on or after January 2012."
Also revealed in the report was a forthcoming "guideline on consumer protection setting out the minimum standards of conduct when dealing with customers, so as to reduce unfair and unethical business practices by banks."
The report also recommends: "The size and liquidity of the stock market has to be increased with the listing of new companies and public sector enterprises. There is also the need for the implementation of comprehensive public float rules and margining requirements to enhance liquidity and to reduce credit risks.
New products, such as exchange traded funds and financial derivatives to hedge risk should also be introduced. It is proposed that a central clearing counterparty corporation will be established to reduce settlement risk in exchange transactions. The development of the corporate bond market is necessary in order to meet the long-term financial needs of the corporate sector, particularly in respect of infrastructure and other long-term investments. The establishment of a long-term government securities yield curve which is used as the benchmark for the pricing of corporate bonds will facilitate the development of the market." |
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