Banking sector consolidation beneficial in the long term says Fitch
Monday, 24 February 2014 00:00
Sri Lanka’s plan to bring about financial sector consolidation is a strong statement of intent of raising systemic stability and boosting long-term economic development, says Fitch Ratings.
If effective, the “Master Plan for the Consolidation of the Financial Sector” should improve the credit profile of financial institutions, strengthen franchises, and reduce supervisory burden.
"Consolidation benefits for the NBFIs include enhanced capital buffers, the ability to attract cheaper and longer-term funding, and improved cost efficiencies. If realised, these benefits should support the credit profile of the NBFI sector more broadly in light of its lending focus on sub-prime customer segments. The reduced number of institutions would also improve regulatory oversight"
The top five banks already account for two-thirds of system assets, and the system could become more concentrated. The authorities wish to build up at least five major banks with an asset base of more than Rs. 1 trillion ($ 7.7 billion) within a “reasonable” period.
Only one bank met this threshold at end-September 2013. The Government intends these institutions to be able to eventually establish a regional presence and improve overall access to funds. The Master Plan also sets a minimum asset size of Rs. 100 billion for the remaining banks, which raises the prospect of further consolidation as seven domestic banks do not meet this threshold.
The authorities also envisage an enhancement of the role of foreign banks in the Sri Lankan economy, and the establishment of one large development bank to provide an impetus to policy-driven development banking activities in the country. Plan execution is to be accompanied by strengthened regulation - including enhancements to minimum capital requirements - and the adoption of Basel III capital standards. If successfully implemented, these measures may even boost the overall position of Sri Lankan banks internationally.
The biggest impact in the near term will be felt across the NBFI sector, which accounts for just 7% of financial system assets, but where the Central Bank wants to sharply curtail the number of institutions from 58 to 20.
Consolidation benefits for the NBFIs include enhanced capital buffers, the ability to attract cheaper and longer-term funding, and improved cost efficiencies. If realised, these benefits should support the credit profile of the NBFI sector more broadly in light of its lending focus on sub-prime customer segments. The reduced number of institutions would also improve regulatory oversight.
The commitment of the authorities to NBFI consolidation is evident from their articulation of broad mechanisms and specific deadlines. It is underlined by the provision of tax, regulatory and concessional loans for the timely completion of valuations, accounting assessments, and other due diligence.
Much of the NBFI consolidation process is projected by officials to be driven by the acquisition of weaker and smaller institutions by their stronger counterparts, or by the banks, and largely completed by the end of this year, and no later than March 2015.
The central bank’s Master Plan follows historical and recent instances of costly and painful failures at several finance companies and one private bank.