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The performance of Sri Lanka’s banking sector during the past two quarters has given us things to ponder about. The sector, which successfully weathered the global financial crisis in 2009 thanks to its conventional banking practices and not exposing itself to toxic financial instruments, appears to be in distress. Though the situation has not clearly threatened the stability of any bank in the country, it has evidently hindered their growth to some extent.

The latest financial performances released by leading banks in the country showed large piles of cash which were not utilized for lending or investing purposes. This phenomenon seems quite obvious, as almost all the leading banks have recorded negative credit growths or one-digit credit growths. As a result the only investing option the banks were left with was government securities—which give them a low yield.

"Sri Lanka’s economic and political history is plagued with policy inconsistencies"

In its growth-oriented monetary policy maneuvering, the Central Bank has cut policy interest rates to historic lows to induce people and businesses to borrow from banks. Despite the Central Bank targeting a credit growth of 16 per cent in 2014, the actual credit growth in January and February was at four to five per cent. Therefore it is important to find out why the public and businesses are not borrowing despite the lower interest regime prevailing in the country.

Sri Lanka’s economic and political history is plagued with policy inconsistencies.  With ad-hoc economic policies and levying of taxes and draconian laws such as the expropriation bill passed in the Parliament a couple of years ago, the present regime has made it worse.  In the meantime bureaucratic red tape and the ambiguous treatment have made many businessmen-local and foreign-shy away from making substantial investments.

 At the same time, consumer-spending has also declined drastically. The Central Bank data showed that the only consumer item that has picked up was the import of motorcars.  The leading consumer-items-manufacturing companies have also found it difficult to explain why there is a dearth in demand for their goods.
This seems to have impacted on the top and bottom lines of the banking sector and rubbing salt to the wound, the Central Bank has initiated a consolidation programme targeting the financial sector. Apparently to rectify the mistake of issuing too many finance licences during the past five years-though the CB won’t admit it.  The possible acquisition of some of these finance companies with their liabilities are unlikely to do any good to any of the banks operating in the country. There is no gainsaying that Sri Lanka’s largely over-bloated financial sector should be consolidated. But the important question is whether it should be regulator-driven or market-driven?