Consolidation will strengthen financial sector - Governor Ajith Nivard Cabraal

By Shirajiv Sirimane

Some criticism have been levelled by a section against the scheme of Banking and Finance Companies Consolidation that has been proposed by the Central Bank in its Road Map. However, economists say that this was a step taken in the right direction and could have been introduced even sooner. The benefits of the financial sector consolidation have already been recognised by the entire industry and Central Bank has also been encouraged by the positive comments received from several international agencies as well as the international credit rating agencies.

Governor Ajith Nivard Cabraal says that they believe that consolidation is an important initiative which would strengthen Sri Lanka's financial sector comprehensively. In our view, the major and long-term benefits of this process would be realised by the industry and by all Sri Lankans in about three to five years time.

By that time, few people who have been criticizing this move mainly because of political reasons would have eggs on their faces." Following are some comments made by the Governor to some questions posed by the media

Q: Many are concerned about the prevailing low rates of interest and fear that their deposits will not provide them with a sufficient income in the future. Will the Central Bank take any action in this regard?

A: Sri Lanka is presently experiencing a sustained period of simultaneous low inflation and high growth, as never before enjoyed in its post-independence history.

This is conducive for economic activity. However, there is also a down side in this situation,in that the country that has been used to high interest rates, now has to adjust to lower interest rates within a short time frame. Such adjustments usually pose some challenges, particularly to depositors and long term savers.

That is why the large banking and insurance institutions should now structure attractive long-term products such as annuities and pension schemes so that the effects of the low interest rates would be offset to some extent, by the robustness of such new innovative products.

The Central Bank has already given guidelines to the key banking and insurance institutions to develop some financial products of that nature, and we believe that over the next few months those institutions would be able to come up with products that would address the expected low interest rate environment.

Q: There has been criticism that the Central Bank has employed a lobbying company in the US at a huge cost. Why did the Central Bank embark on such a course of action?

A: After the end of the battle against terrorism the former LTTE international network which was raising funds for terrorism, has re-invented itself as human rights crusaders.

They are now furiously lobbying in the world capitals against Sri Lanka with all types of bogus claims and half truths to tarnish the image of the country and thereby destabilise the economy. As is well known, and exposed in Wikileaks as well as in the social media, the former LTTE international network is still raising large amounts of money and lavishly spending such money on political campaigns of various chosen politicians in many North American and European countries.

Some of those well funded elements are active in Sri Lanka as well, in various disguises.

It is therefore, important that the Sri Lankan authorities expose these former terrorist organizations and individuals of the LTTE international network, who are today masquerading as human rights and governance activists.

It is only by doing so that the damage they are causing to our country and economy,could be reduced. To do so effectively in certain North American countries, especially the USA, the practices engaged in those countries are getting our own message across have to be followed.

Otherwise, we would not be effective. It is in that background, that the Thompson Advisory Group (TAG) have been engaged to help the Central Bank to convey a correct and accurate message about our country and our economy to the US authorities including the politicians, and investors.

We must not forget that there are many US investments in our economy and we need to give our US investors the right picture so that they are not misled by the propaganda and lies of the ex-LTTE international network.

That sustained effort has helped our effort enormously, and we have been able to change some of the wrong impressions, although it must be admitted that more work needs to be done, in the face of a massive and well-funded campaign by the ex-LTTE international network.

It must also be mentioned that, as long as forces inimical to Sri Lanka, here and abroad, are active and are portraying erroneous pictures to the outside world about our country and our economy,the Sri Lankan authorities also have to be active and try to counter the formation of wrong perceptions.

It is however sad that those persons who are criticising the Sri Lankan authorities' efforts to counter this various propaganda of the ex-LTTE international network, conveniently turn a blind eye to the propaganda of the ex-LTTE international network, which is spending millions of dollars to portray a completely wrong picture about Sri Lanka to the outside world.

Q: Recently, there have been allegations that the Central Bank and the DCS have been churning out "bogus" statistics, which have been designed to mislead international investors. What is your response?

A: There are some politicians in our country who would be over-joyed if the Sri Lankan economy was collapsing or in the doldrums. In fact, some of them predict the collapse of the economy once every three to four months, and are naturally very disappointed when that does not happen.

Needless to say, these persons cannot bear to see the country's macro-fundamentals improving, and therefore, they are now desperately trying to "shoot the messenger" by claiming that the information and statistics presented by the Department of Census and Statistics (DCS) and the Central Bank are not reliable.

However, we state with responsibility that the Sri Lankan data and information is collected, collated and disseminated by the Central Bank and the DCS according to international standards and practices. We have also continuously maintained consistency and excellent professional standards and the highest levels of integrity in this endeavour.

Therefore, if some politicians do not like it, there is nothing that we could do other than to advise them to show greater maturity and accept these figures in the right spirit, and shift their criticism to another dimension!

Q: Although you speak of a growing and stable economy, there are many people who say that they do not feel the economic growth. What have you got to say to them?

A: Notwithstanding anything that anyone may say, an enormous transformation has taken place in our economy, and that change is clearly visible and reflected in the lifestyles of people, in the urban and rural areas. Food consumption, employment opportunities, educational opportunities, entertainment, transport facilities, health services etc. have shown tremendous improvement. In fact, if any persons were to assess their own living conditions today, and compare that with that of eight years ago, they would see a major improvement in the way they work, live and play.

However, we have to admit that there are still some persons, who have not been touched sufficiently by this rapid development, both at national and individual levels. Further, although the number of such persons has reduced dramatically, we still have to work hard until the fruits of development reach and touch each and every individual in our country.

Accordingly, over the next few months, more work will need be done to reduce the poverty levels further from its current 6%, and I think as a result of such efforts, we would be successful in reducing poverty to a targeted level of about 3% by 2016. When that is done, Sri Lanka would surely be eligible to be hailed as a "model" in inclusive economic transformation, and we are working hard towards that outcome.

Q: The CIFL depositors are blaming the Central Bank that they are suffering because the Finance Company has not been supervised properly and that therefore they have suffered a huge loss. What is your response?

A: The CIFL represents much less than 0.1% of the banking and finance sector of our country.

That shows clearly that the CIFL issue is not a supervisory failure, but a issue that has been prompted by circumstances that are peculiar to the institution, namely the misconduct of certain directors. Nevertheless, in response to the resulting liquidity and management crisis in the Company, the Central Bank had taken the required steps in accordance with the law to restructure the company and to source a new investor. There is already provision in the Finance Business Act for the restructuring of Finance Companies, if and when they face difficulty or crisis.

That is because the law recognizes that financial institutions could face turmoil at times, however effective the supervision may be.

But, that re-structuring process has now been stalled as a result of a injunction which has been issued by the Court of Appeal on the petition of a few depositors. Hence, the restructuring process would proceed only if and when that injunction is lifted, allowing the Central Bank which is the regulator to take further action in this matter. In the meantime, we ourselves, are deeply concerned because usually the state of companies erode further, when business activities are suspended, and that is why we hope that we would be in a position to intervene sooner than later.

Q: Are you satisfied with the progress of Golden Key Plan of Action?

A: The Plan of Action that was proposed by the Central Bank for the Golden Key depositors is now being implemented by the Golden Key Company and the Court appointed Task Force, and all stakeholders are now beginning to see some tangible results.

While the progress was somewhat slow at the initial stages due to having to put the Golden Key House in order, there is now a greater momentum, and we are confident that the targets as per the Plan of Action can be met within a reasonable time frame.

It must also be noted that restructuring of any institution is a highly complex matter, and a "one size fits all" approach cannot be implemented by persons who are not knowledgeable in the subject of business revival. Fortunately, the Supreme Court took this view last year, and now depositors have renewed hope about the success of this plan. I must also say that many people worked hard towards this outcome behind the scene to achieve this state of affairs, and I am personally thankful to all of them for their dedication and commitment.

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Financial sector consolidation as at end of February 2014

The progress in the consolidation effort has been satisfactory during the month of February 2014. Meetings with foreign bank representatives: One-to-one meetings took place with regional representatives and senior management of foreign banks at which the foreign banks agreed to play an increasingly active role in the economic activities of the country. Merger between National Development Bank PLC and DFCC Bank: In line with the joint announcement made in January 2014, the work is in progress to finalize the merger of the two banks. Due diligence:A framework for the carrying out of due diligence activities has been established, and the audit firms that are eligible to audit banks, finance and leasing companies (NBFIs) have commenced due diligence on the respective companies. Regulatory coordination: The Securities and Exchange Commission of Sri Lanka and the Colombo Stock Exchange have agreed to set up a fast track process to facilitate the expected consolidations. Tax related matters:

The officials of the Ministry of Finance and Planning and the Department of Inland Revenue have agreed to deal with the tax issues that are expected to arise consequent to the consolidation process. They are also drafting the required laws to give effect to the proposals announced in the budget. Awareness programmes: CBSL officials participated at many knowledge sharing events on the subject of consolidation.

These events have also provided opportunities to clarify certain matters raised by stakeholders. In the meantime, the Central Bank notes the positive sentiments. the consolidation process and the resultant expectations of raising systemic stability and boosting long-term economic development, as expressed by International Rating Agencies. Further, the Central Bank welcomes the reaction of certain International Agencies that have conveyed their desire to provide advice and funding in the process of consolidation.