Govt. announces key measures to encourage M&A in financial sector

• To merge 3 State-owned financial entities to form National Development Banking Corporation
• Push for NBFI sector consolidation; parent banks asked to acquire finance companies 
• New legal framework to restructure Department of Supervision of Non-Bank Financial Institutions of the Central Bank

The government yesterday announced measures to encourage and promote mergers and acquisitions (M&A) in the country’s financial sector, starting with a merger among three State-owned financial entities.

The plan also entailed a major push to strengthen the country’s non-bank finance institutions (NBIFs) through consolidation, while overhauling the regulatory body with a fresh a 
legal framework.

“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,” Prime Minister and Minister of Finance, Mahinda Rajapaksa said in Parliament yesterday, delivering the maiden budget of the government.

He proposed to establish a National Development Banking Corporation (NDBC) by merging three State owned entities— Housing and Investment Bank, Housing Development Real Estate Limited and Regional Development Bank.

In order to encourage M&A activities in the financial sector with tax reliefs, he proposed to consider the investment expenditure in acquisitions as deductible expenditures.

The government also weighed in on possible mergers of finance companies functioning under commercial banks with their banks in order to strengthen the banking sector.

To support these activities, the government said it plans to enable commercial banks to act as investment banks by amending the required laws with the view to enhancing diversification of the 
finance sector.

Meanwhile, the Prime Minister also announced that a committee of specialists would be soon appointed for the preparation of a new a legal framework for the sector, which would be presented to Parliament.

The new framework is expected to completely restructure the Department of Supervision of Non-Bank Financial Institutions of the Central Bank while formulating a robust organisational structure to regulate NBIFs, based on the recommendations of the Presidential Commission of Inquiry appointed to investigate alleged malpractices of Edirisinghe Trust Investments Finance Limited (ETIFL) and its subsidiary companies.

He noted that 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.

At least, nine NBIFs were non-compliant with the minimum capital requirements issued by the CB. However, the CB has extended the deadline for these entities to meet capital requirements encouraging consolidation.

According to Fitch Ratings, Sri Lanka’s small-to-mid-sized NBIFs were on a rocky path, which is now further worsened by COVID-19 infused economic slowdown coupled with restrictions on vehicle imports.