Central Bank urges banks to consolidate

17 January 2013 09:49 am Views - 4462

The Central Bank (CB) yesterday renewed its calls for consolidation in the banking sector of the country, which is overcrowded with 24 Licensed Commercial Banks (LCBs) and nine Licensed Specialized Banks (LSBs), with over Rs.5 trillion worth assets.

Speaking on the encouragement and the additional leeway provided for LCBs in mobilizing funds from foreign markets, as a way of managing the liquidity risk and the Asset-Liability Mismatch (ALM) risks, both of which are typical in banks, T.M.J.Y.P. Fernando, Director of Bank Supervision at the Central Bank, emphasized the importance of consolidation in terms of mergers and acquisitions in the sector.

“Even though a few of our banks seem to have larger balance sheets, they too become smaller in size in global financial markets, particularly when they attempt to mobilize foreign funds. We issued only two licences last year (of which, one is also provisional) and we firmly stand, no more licences will be issued for LCBs because we believe consolidation is the only way out,” she said, echoing the words of the Central Bank Governor, who made the same call a fortnight ago.

Dr. Koshy Mathai, the International Monetary Fund Resident Representative for Sri Lanka, also held the view at a recently held forum that the Sri Lankan banking sector is small relative to the size of the economy, despite being healthy in terms of profitability (ROE of 20.5 percent), asset quality (Gross NPL of 4.0 percent), total capital adequacy of 15 percent with plenty of banks and branches.

Bank of Ceylon, the only bank with an asset base of Rs.1 trillion contracts to 8 billion once translated into US dollars. Without larger balance sheets, loan syndication becomes difficult with too many small banks.

The Sri Lankan banking sector assets are largely funded by deposits with 76 percent of the share, followed by 15 percent borrowings and 9 percent capital funds. During 2012, the local banking sector managed to borrow US$ 973 million from foreign sources. The total borrowings grew at 38.6 percent to Rs.800 billion up to October 2012.

Meanwhile, commenting on sourcing finance outside the borders, Nihal Fonseka, CEO of DFCC Bank PLC, acknowledged local funding was insufficient, due to slow progress made in the domestic capital market in the past, predominantly the corporate debt market, where not many capital raising instruments were available.

“Until recently, our capital account remained tightly controlled. Therefore, foreign funding was also limited due to exchange controls prevailed at the time. Nevertheless, now that significant progress is being made in liberalizing the exchange controls, where the government too facilitated DFCC and NDB to raise overseas funding,” he remarked, participating a forum on ‘Building the Bank’s Strategy Around Risk Management’ held in Colombo.

Budget 2013 proposed to allow DFCC and NDB bank to raise US$ 250 million each, with up to 10-year tenure to fund SMEs, plantation, construction and manufacturing industries.