Budget 2021 unveils key reforms in financial services sector

Wednesday, 18 November 2020 00:22 -     - {{hitsCtrl.values.hits}}


  • Committee of specialists to prepare legal framework and present relevant bill to P’ment for better regulation of finance companies, revamp of Dept. of Supervision of NBFI at CB
  • Out of the 58 finance companies only 20 account for assets over Rs. 20 b
  • PM encourages mergers and consolidation; banks which have controlling stakes in finance companies to merge
  • Commercial banks to also act as investment banks
  • National Development Banking Corporation mooted by merging Housing and Investment Bank, Housing Development Real Estate Limited and Regional Development Bank

The 2021 Budget unveiled yesterday listed key reforms in the financial services sector including much-needed consolidation within finance companies and revamp supervision of non-bank financial institutions. 

Prime Minister and Finance Minister Mahinda Rajapaksa in his 2021 Budget speech said the Attorney General has been directed to expedite legal action against the Edirisinghe Trust Investments Finance Ltd. (ETIFL) and its subsidiary companies in line with the Report of the Presidential Commission of Inquiry appointed to investigate alleged malpractices of the ETIFL.

He said the Presidential Commission of Inquiry has pointed out the need to prevent the malpractices that jeopardises the credibility of the entire finance company sector over a long period, indirectly impacting the financial, banking and entire economic process.

“Therefore, it is recommended to completely restructure the Department of Supervision of Non-Bank Financial Institutions of the Central Bank and to formulate a robust organisational structure to regulate finance companies as per the recommendations of the Presidential Commission of Inquiry,” Rajapaksa said. 

The Commission has presented an extensive study on the legal framework used in the Great Britain and India relating to the regulation of the sector. 

Prime Minister said he is to appoint a committee of specialists for the preparation of such a legal framework and to present the relevant bill to the Parliament.

The need for merging finance companies in a way that strengthens the companies currently functioning commercially in the sector has been identified as well. 

It was recalled that merging 21 finance companies as 10 finance companies under the 2014 Budget led to the stabilisation of the financial system. However, non-implementation of such processes during the last five years and the economic downturn in the country have caused many finance companies such as the ETI to shut down. 

It is essential to take legal action against those who are responsible for this, especially considering the additional capital required to rebuild these companies and the financial pressures amounted through their mergers with other companies. 

The main aim of the Government is to assist the helpless depositors of these companies. Accordingly, these depositors will be facilitated under the deposit fund held with the Central Bank, supported by the People’s Bank.

The Premier told Parliament out of the 58 finance companies functioning in the country, only 20 companies account for assets over Rs. 20 billion. 

“In order to strengthen these finance companies, I propose to merge the subsidiary finance companies that have not been cancelled by the Central Bank of Sri Lanka with the parent company. Further, it is proposed to merge the finance companies functioning under commercial banks with the banks in order to strengthen the banking sector,” Rajapaksa said. 

With the aim of incentivising the strengthening of banks and finance companies, he proposed to consider the investment expenditure in acquisitions as deductible expenditures. Prime Minister also proposed to amend the necessary laws to enable commercial banks to also act as investment banks with the view to enhancing the diversification of the finance sector.

“I also propose to establish National Development Banking Corporation (NDBC) by merging Housing and Investment Bank, Housing Development Real Estate Limited and Regional Development Bank,” Rajapaksa said, adding that reform the banking and financial sectors is key to ensure availability of credit and financing for the production.