Fresh impetus for financial sector consolidation from Govt. via new policy

Critical financial sector consolidation is to get a fresh impetus from the Government with a new policy setting its future course. 

Official sources told the Daily FT that the Government is of the view that consolidation of financial institutions will be beneficial in the long term as it will enhance the size of the banks and increase their foreign borrowing and risk-taking capacities to enable private banks to participate in large State and private sector projects and finance emerging new industries to a greater degree than now. 

The Committee headed by former Commercial Bank Chairman Dinesh Weerakkody and an advisor in the current Government who was appointed to Chair the banking sector consolidation review committee in 2015 recommended the Government to halt the forced consolidation roadmap and instead encourage voluntary consolidation of financial institutions. 

Sources said that nearly 18 months into the term there had been no progress whatsoever, the situation in some Non Bank Financial Institutions (NBFIs) had gone from bad to worse and the NDB - DFCC negotiations were stalled.

While the consolidation would continue to be voluntary in principle, sources said the Government through its ownership in several banking institutions hopes to play a pivotal role in engaging boardroom and shareholder dialogue to actively promote such opportunities. Therefore the new policy would not look to dilute shareholdings but to strengthen existing shareholding.

Analysts say the majority of the Chairman or Directors in financial sector institutions don’t represent shareholders and therefore have no interest in creating bigger or stronger financial institutions.

Many of the Directors appointed by the former regime still continue at Commercial Bank, HNB, Seylan, NDB and Pan Asia Bank. 

The attempt to vote out Directors failed this year at AGMs because the State-managed EPF Shareholding did not vote with the Government due to a miscommunication between the former Governor and a Minister. 

The EGM called for by the Government shareholders at Seylan Bank in May 2016, was also postponed temporarily until the Government policy was properly formulated in the 2017 Budget proposals. 

A former Bank CEO is expected to formulate the required policy interventions and lead the effort.

(Editor’s Note: This article is being republished as the table was not comprehensive in the first instance.)