Central Bank unveils new way forward for financial services sector
Friday, 3 January 2014 00:00
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The Central Bank yesterday unveiled a new vision for the banking and non banking financial sector aimed at aligning this key sector with country’s overall thrust to become a $ 100 billion economy by 2016 from the present $ 67 billion.
Governor Nivard Cabraal said the resulting outcomes of the new vision would lead to a new “equilibrium” in the banking sector in Sri Lanka.
“The Central Bank’s role will be that of a pragmatic systemic risk mitigator, and a guide that encourages innovation in order to ensure the overall goal of financial system stability the present skewed banking structure will need some structural changes to ensure that Banks and NBFIs will be equipped to play the required role in the envisaged US$ 100 b economy,” he added.
Following are some of the salient features of the new vision for the financial services sector:
At least five Sri Lankan banks will have assets of Rs. 1 trillion or more, with such banks also having a strong regional presence
There will be a reduced number of banks as a result of mergers and consolidations
There will be a large Development Bank that will provide a substantial impetus to development banking activities in the country
Banks will rely on new and effective IT applications
Banks will have substantially lower interest margins through increased efficiency and prudent assets and liabilities management
Foreign banks in Sri Lanka will demonstrate a greater participation in economic activities, and will be making significant contributions to the economy
The Central Bank’s policies will be forward looking and designed to balance potential worldwide policies and adjust to sudden volatilities
Adequate capital and other buffers will be put in place to prepare the Sri Lankan financial sector to withstand business cycles, without sacrificing investment potential during periods of global economic downturn
Greater cohesion and overall sectoral integration would provide a stronger thrust to propel the financial sector towards a more sustainable growth model
Consolidation in the banking and the NBFI sectors will have to be encouraged, using the attractive tax concessions provided by the Government
The regulatory framework will have to be re-designed to monitor the emerging business models of banks and NBFIs
Over the next few years, the financial sector will be encouraged to move towards this new vision.
The Central Bank’s role will be that of a pragmatic systemic risk mitigator, and a guide that encourages innovation in order to ensure the overall goal of financial system stability the present skewed banking structure will need some structural changes to ensure that Banks and NBFIs will be equipped to play the required role in the envisaged US$ 100 b economy
The regulatory regime will have to be strengthened, while encouraging diversification of sources of funding and business operations, including through foreign sources
The risk profiles of banks and NBFIs will have to be identified and regulated in order to ensure overall stability of the financial sector and enhance public confidence
The two large State commercial banks, BOC and PB, will be encouraged to grow and expand towards a stronger regional presence, and to operate with higher levels of capital
The NSB will be encouraged to broad base their banking activities to contribute to the economy on a larger scale
The Pradeshiya Sanwardhana Bank will be encouraged to serve the niche market of microfinance, targeting inclusive growth in the provinces
The other smaller State banks will be encouraged to merge and play a more cohesive role, since at present these banks account for just 1.1% of the market share!
The banks with assets less than Rs. 100 b will be expected to grow beyond Rs. 100 b through organic growth or consolidation/merger with other banks/NBFIs, over a reasonable time horizon
The two Development banks, NDB and DFCC, will be encouraged to merge in order to create a strong development bank that could provide a broader impetus to development banking activities
Foreign banks will be invited to demonstrate greater participation and contribution to the economy
Commencing 2016, new foreign banks will have to be locally incorporated
Licensed Commercial Banks - minimum Rs. 10 b
Licensed Specialised Banks - minimum Rs. 5 b
The State banks will be expected to contribute significantly towards building a strong and dynamic banking sector
In keeping with such vision, banks will be expected to submit broad plans by 30 June 2014 for possible mergers and/or consolidation, and for the greater participation in the economy banks’ capital will be strengthened significantly.
Increase in minimum capital requirement:
Target Date:
Existing banks, from 1 January 2016
New banks, from 1 January 2015
Migrate to the advanced approach under the Basel II Capital
Increase in quality and quantity of capital of bank;
Introduction of a capital conservation buffer with the intention of creating capital buffers in good times that can be used to absorb shocks in periods of stress; and
Introduction of a counter-cyclical buffer to reduce pro-cyclicality to prevent excessive credit growth
3rd and 4th Quarters 2014:
In November 2014: Issue Direction to maintain minimum capital ratios effective from 1 January 2015
Larger aggregate capital base
Increased potential to finance large scale transactions
Increased investments by foreign investors
Improved level of efficiency and corresponding profitability
Availability of a full range of financial services at affordable costs
More effective supervision to ensure financial system
Increase the quality and quantity of capital to improve the NBFIs loss absorbency capabilities and enhance resilience to internal and external shocks
Attract low cost, long term funds in the form of deposits/debt instruments
Improve cost efficiencies in order to be competitive
Diversify the business models and be ready to deal with market volatilities
Adequacy Framework requirements by the implementation of Standardised Approach for calculating capital charge for operational risk under Pillar 1
Target Date: During 1st Quarter 2014
Adopt Basel III Capital Standards
Target date: During 3rd Quarter 2014: Issue of guidelines on parallel computation of the Capital Adequacy Ratio
Supervisory observation period
Central Bank also said the risk management framework of banks will also be improved further.
The resulting outcomes will lead to a new “equilibrium” in the banking sector in Sri Lanka
Consolidation of NBFI sector
Stability while moving towards a US$ 100 b economy, the consolidation of the NBFI sector will be vital
The objective of merger/consolidation plan would be to fashion an NBFI sector that comprises of smaller number of large NBFIs, which are fully compliant with the Central Bank’s regulatory framework, and which will serve to:
Manage risks in an integrated manner
Improve the governance, fitness and propriety of directors and senior management to establish operational accountability
A corporate group will be allowed to operate only one NBFI after end June 2014
Licensed banks will be actively encouraged to acquire NBFIs
Large NBFIs will be encouraged to acquire or merge with smaller NBFIs
Smaller NBFIs will be encouraged to merge with one another to create large NBFIs
New investors or banks or large NBFIs will be encouraged to acquire negative net worth NBFIs, or lowly capitalised NBFIs with the new equity investments being made directly into the negative net worth NBFIs or selected lowly capitalised NBFIs in order to supplement the capital of such NBFIs – When a new investor makes an equity investment of that nature, a matching long term advance will be made through the Sri Lanka Deposit Insurance and Liquidity Support Scheme, on concessionary terms
Consultancy fees for merger and consolidation processes will be paid by the Central Bank to facilitate the process
A NBFI sector consolidation plan will be implemented with incentives proposed from the 2014 Budget
Accordingly, they will be required to acquire/merge if they operate more than one NBFI. A group is to be defined as a holding company, which owns more than one NBFI, or where common shareholders or directors own controlling stakes in more than one NBFI
The Central Bank will also establish a separate unit headed by an Assistant Governor to assist in the merger/consolidation process
A group could operate only one NBFI by June 2014
Directors who own controlling shares in more than one NBFI to arrange for the merger between the NBFIs by June 2014
Investors or banks or large NBFIs to acquire negative net worth NBFIs or selected lowly capitalised NBFIs. NBFIs, which are currently having negative net worth are expected to be absorbed by December 2014. Others to be completed by 2015.
Increase of minimum core capital of a LFC to Rs. 1 b by 1 January 2016
Increase of minimum core capital of a LFC to Rs. 1.5 b by 1 January 2018.
Introduce a system of lower leverage ratios to NBFIs which are only partially-compliant with the Directions of the Central Bank
Publish the maximum deposit levels for each NBFI on a quarterly basis, beginning 2Q, 2014
Introduce a liquidity support fund for NBFIs which require short term liquidity support, by 2H, 2014
Closely monitor the implementation of the proposed consolidation/merger plan
Strengthen the risk focused regulatory and supervisory system
The NBFI Consolidation/Merger Plan will be implemented according to a time-bound plan
Simultaneously, the Central Bank will significantly enhance the level of regulatory action in the NBFI sector, and will
Use an online early warning system to identify emerging risks in an NBFI
Impose penalties on, and/or disqualify from holding office, key management personnel when there are continued non-compliances of Central Bank Directions
Review and follow up the rehabilitation process of weak companies in the NBFI sector, and revive such companies in keeping with the proposed medium term consolidation plan
Expedite the investigation processes on unauthorised finance businesses
Lottery schemes will be prohibited
New guidelines will be issued on non-interest incentive schemes offered by banks to mobilise deposits
Accuracy of disclosures on interest rates, fees and charges, etc. will be closely monitored
The implementation of the current Directions on Customer Charter of banks will be enforced
More focused attention will be given to customers’ complaints and consumer protection, so as to address grievances in an efficient and timely manner
In this newly emerging scenario, certain marketing practices currently pursued by Banks and NBFIs will have to be discontinued
The emerging macro-economic fundamentals will be ideal for the introduction of effective superannuation products by banks and NBFIs. The current and impending low interest regime is likely to be challenging to savers who are dependent on interest income.
Therefore, banks, NBFIs and Insurance companies will be encouraged to develop and introduce effective and innovative long term superannuation products to provide more opportunities to long term savers:
Annuities
Pension products, including Employer sponsored pension products
