Retrenchment unavoidable in consolidation

Job retrenchment and streamlining of cost structures are likely to be an inevitable by-product of consolidation in the banking and finance sector, according to Association of Professional Bankers of Sri Lanka President and Sampath Bank Managing Director, Aravinda Perera.

“We’ve talked about not having to retrench and having a very low unemployment ratio in the country, and the political reality is such that this cannot be changed but the private sector reality is that when two entities merge there will be many positions that will be duplicated, therefore retrenchment is the only way.

“NDB, DFCC and Vardhana have three CEOs and the reality is after the merger there can only be one, that cannot be avoided.” Perera noted.

Particularly in the case of the Non-Banking Financial Institutions (NBFIs) Perera warned that without retrenchment, the impact of consolidation may be delayed.

 “Cost efficiency is already a problem in terms of the NBFI sector, and if we can’t retrench jobs in the sector that it will take a long period of time,” Perera stated.

Despite such concerns however, he stated that a no-retrenchment approach to consolidation could be successfully mitigated by adjusting company recruitment and allowing for normal retirement within the sector.

“Many people retire from our organizations every year, so it’s a question of two years that you will have to ease on recruitment. Many of the people who retire from the banking sector go on to be consultants at NBFIs and while these people should be allowed that route, there will likely be some redistribution there as well but in a few years I believe we can achieve cost efficiency,” Perera said.

He made the comments during a discussion on the subject of consolidation organized by the Sri Lanka Economic Association, but also in response to questions raised by fellow panelists and Senior lecturer at Department of Economics at the University of Colombo, Dr. Chandana Aluthge.

“The condition of no retrenchment advanced by the Central Bank seems a bit artificial. A bigger institution does not necessarily mean a stronger one and there are many complex questions related to efficiency and cost structures and salaries that must be explored carefully.

“While I support reform and consolidation, the implication of this process is that the entities that we have now are not strong enough and the point of this process is to make them stronger by making them more efficient,” Dr. Aluthge noted.

Given the complexity of such a drastic reorganization within the banking and NBFI sector, Dr. Aluthge warned against rushing to consolidate the sector in an oversimplified manner, an approach that could trigger a larger-scale crisis in the sector.