Big is better!

Thursday, 16 January 2014 00:00 -     - {{hitsCtrl.values.hits}}

  • Central Bank to unveil Master Plan for financial sector consolidation tomorrow
  • Post unveiling of the Master Plan, one-to-one discussions will be held with all banks and non-bank financial institutions with CB support
  • There will not be any retrenchment of staff in banks and non-bank financial institutions but all asked to align their immediate future business plans, recruitment and capital expenditure towards consolidation
  Central Bank will unveil tomorrow a Master Plan for financial sector consolidation keeping in line with the 2014 Budget proposal by President and Finance Minister Mahinda Rajapaksa in November as well the monetary authority’s 2014 Road Map unveiled a fortnight ago. “In order to steer Sri Lanka towards the economic goals set for 2016 and beyond, a stable financial sector with strong and dynamic financial institutions has to be created,” the Central Bank said this week. “Accordingly, a Master Plan on the consolidation of the financial sector to achieve such an outcome will be articulated by the Governor to the relevant stakeholders on Friday 17 January 2014 at the Central Bank,” it added. Post unveiling of the Master Plan, one-to-one discussions will be held with all banks and non-bank financial institutions so as to guide these institutions in accordance with the newly announced plan. The Central Bank will also closely monitor and support the consolidation process in order to ensure that it will be smooth and constructive. In the meantime, the Central Bank has requested all institutions involved in the process to ensure that there will not be any retrenchment of staff in banks and non-bank financial institutions as a result of this consolidation process, and to align their immediate future business plans, recruitment and capital expenditure, to be in line with the new developments that are to take place over the next few months. In the 2014 Road Map presentation, Central Bank Governor Nivard Cabraal said the present skewed banking structure will need some structural changes to ensure that banks and non-bank financial institutions (NBFIs) will be equipped to play the required role in the envisaged $ 100 billion economy by 2016. He said consolidation in the banking and the NBFI sectors will have to be encouraged, using the attractive tax concessions provided by the Government and the regulatory framework will have to be re-designed to monitor the emerging business models of banks and NBFIs. Furthermore the regulatory regime will have to be strengthened, while encouraging diversification of sources of funding and business operations, including through foreign sources whilst the risk profiles of banks and NBFIs will have to be identified and regulated in order to ensure overall stability of the financial sector and enhance public confidence. Cabraal said to sustain the positive outlook of the economy and to ensure financial system stability, the banking sector will need a new vision in the run-up to 2016. This vision entails at least five Sri Lankan banks will have assets of Rs. 1 trillion or more, with such banks also having a strong regional presence; There will be a reduced number of banks as a result of mergers and consolidations and there will be a large development bank that will provide a substantial impetus to development banking activities in the country Banks will rely on new and effective IT applications and have substantially lower interest margins through increased efficiency and prudent assets and liabilities management Foreign banks in Sri Lanka on the other hand will be required to demonstrate a greater participation in economic activities, and will be making significant contributions to the economy. The overall financial sector will be encouraged to move towards this new vision as the Central Bank’s policies will be forward looking and designed to balance potential worldwide policies and adjust to sudden volatilities. It will ensure adequate capital and other buffers are put in place to prepare the Sri Lankan financial sector to withstand business cycles, without sacrificing investment potential during periods of global economic downturn Greater cohesion and overall sectoral integration, according to the Central Bank would provide a stronger thrust to propel the financial sector towards a more sustainable growth model The Central Bank’s role will be that of a pragmatic systemic risk mitigator, and a guide that encourages innovation in order to ensure the overall goal of financial system stability. The Central Bank will also unveil a NBFI sector consolidation plan taking strength from incentives proposed from the 2014 budget. This is on the premise that to ensure financial system stability while moving towards a $ 100 billion economy, the consolidation of the NBFI sector will be vital. The objective of merger/consolidation plan would be to fashion an NBFI sector that comprises of smaller number of large NBFIs, which are fully compliant with the Central Bank’s regulatory framework, and which will serve to achieve several objectives. They include increase the quality and quantity of capital to improve the NBFIs loss absorbency capabilities and enhance resilience to internal and external shocks; attract low cost, long term funds in the form of deposits/debt instruments; improve cost efficiencies in order to be competitive; diversify the business models and be ready to deal with market volatilities; manage risks in an integrated manner and improve the governance, fitness and propriety of directors and senior management to establish operational accountability.