‘Mergers should protect interests of SMEs’

The move to consolidate banks and finance companies has been hailed by the business community as a step in the right direction to salvage poorly performing entities and safeguard the interest of investors.

However, they said that the interest of small and medium scale entrepreneurs and depositors should not be undermined through cartels that could be created as a result of mergers.

Senior banker Mangala Boyagoda said that the decision to merge large entities with small ones is a sound move that will boost economic growth and create a stable financial sector.

He said that cultural issues will arise if small entities are merged with big companies. The cost to income ratio has to be taken into account in mergers if it is to be successful. If the merged entity does not expand many issues will arise affecting the interest of stakeholders.

The Central Bank in its Road Map outlined the importance of creating a vibrant financial sector to create a US$ 100 billion economy by 2016.

A senior officer of the Central Bank said that there should be large banks and finance companies to attract foreign business and boost profits.

The Central Bank hopes to reduce the number of finance companies and create large robust entities that will spur economic growth and help create a strong financial sector.

Of the 58 finance companies around 40 to 50 percent are not breaking even and some are in a bad shape.

Boyagoda said that the timeframe for the consolidation should be extended for more consultation and deliberations. There is also fear that employees of the merging entities will lose their jobs.

Gajma and Co Chartered Accountants partner N.R. Gajendran said that consolidation is a appropriate move to set up stable banks and finance companies as a large number of the finance companies are unable to break even.

There is a fear that the small and medium sector borrowers will lose their borrowing base. He said that these issues should be taken into account in safeguarding the interest of small-time borrowers.

There should be strong regulations for institutions on the interest rates for small-time borrowers with certain percentage of lending for SMEs.

He said many finance companies ran into trouble due to mismanagement, fraudulent deals and external factors such as the drop in gold prices that hit the pawning sector. The global financial crisis had a negative impact on the stability of the financial sector.

The 'too-large-to-fail banks' notion has moved regulators across the world to take more risk mitigating steps and strengthen the stability of the financial sector.

The fall of Lehman Brothers is a case in point. The capital and liquidity adequacy ratios have been increased and entities are regularly assessed on its financial stability.

Registered finance companies have failed since the late 1980s.

The fall of the Pramuka Bank and a large entity of the Ceylinco Group triggered financial instability in 2008.

Around 16 commercial banks operate in the country of which only few have an asset base of over Rs. 500 billion.

In this scenario experts said that there is a grave need to create a robust financial sector.

LF