Government to encourage mergers in banking sector

By Gamini Warushamana

The Government will encourage the merger of two of the largest development banks in the country, the NDB and the DFCC, said Central Bank (CB) Governor Ajith Nivard Cabraal. The government will encourage mergers and acquisitions in the Banking and Non Bank Financial Institution (NBFI) sectors to strengthen the financial sector, said Cabraal, presenting 'Road Map 2014 - monitory and financial sector policies for 2014 and beyond', in Colombo last week.

Cabraal said that the present skewed banking structure needs some structural changes to ensure that banks and NBFIs are equipped to play a vital role in the envisaged $100 billion economy."We encourage consolidation in the banking and NBFI sectors using attractive tax concessions provided by the government.

The regulatory framework will be redesigned to monitor the emerging business models of banks and NBFIs.The regulatory regime will be strengthened while encouraging diversification of sources of funding and business operations including foreign sources," he said.

He said that the two large State banks, the Bank of Ceylon and the Peoples Bank will be encouraged to grow and expand towards a strong regional presence and to operate with higher levels of capital.

The National Savings Bank will be encouraged to broadbase its banking activities and increase its contribution to the national economy. Regional Development Banks will be encouraged to serve niche market of micro finance while other small State banks will be encouraged to merge and play a more cohesive role. According to Road Map 2014, banks with assets of less than Rs.100 billion are expected to grow beyond Rs.100 billion through organic growth or consolidation through merger or acquisition with other banks or NBFIs. The merger of the two largest development banks will strengthen the sector. Foreign banks will be invited to increase their contribution to the economy. From 2016 new foreign banks launching operations in Sri Lanka will have to be locally incorporated.

The CB has set a time frame for strengthening the capital base, setting up of a risk management framework and implementation of a new regulatory framework for the banking sector.

The NBFI sector consolidation plan too will be implemented simultaneously with incentives proposed in the 2014 Budget. The NBFI merger plan will be implemented through a time-bound plan. Cabraal said that a strong financial sector is needed to cater to the growing economy and that banks and NBFIs should be strong enough to face shocks.