Saturday, 11 April 2015 01:48
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Key recommendations made on the way forward for banks and NBFIs
Prime Minister Ranil Wickremesinghe yesterday formally received the copy of the report of the Experts Committee appointed to review the financial sector consolidation initiated by the previous regime and recommend the way forward.
The committee, headed by top professional Dinesh Weerakkody, has emphasised that the voluntary consolidation of banks was a normal business activity which created an enabling environment and should be actively encouraged by the new Government by providing the required legal framework and removing impediments and disincentives (e.g. taxation and manpower related).
“Therefore, the decision to consolidate should be driven by the entities themselves. However, even in a voluntary consolidation the successes of mergers are limited. Therefore mergers to be carried out within a stipulated timeframe as stipulated in the Central Bank master plan will have even less of a chance of succeeding and therefore should be avoided in the future,” the committee noted.
It said that when banks consolidate voluntarily, they take the needed measures to protect their own interests and would not participate in any merger or acquisition unless it is driven to benefit all stakeholders.
Since experience suggests that some stakeholder groups may oppose consolidation to safeguard their own vested interests, the Central Bank can encourage consolidation by implementing a differentiated regulatory regime depending on the size and strength of banks as measured by key prudential factors.
In Singapore, the committee pointed out, prior to initiating financial sector consolidation, an enabling environment was created by introducing the necessary legislative changes to avoid post consolidation ambiguity.
The need for amending Sri Lanka’s Banking Act and directions to provide a robust platform for both organic growth and consolidation has been emphasised as well.
The involvement of the State in private sector banks must be reduced either through the application of the same aggregated shareholder limits as applicable to private shareholders or by placing a cap on aggregate voting rights to promote good governance and stability within the private sector banks.
With regard to Non-Bank Financial Institutions (NBFIs), the committee said the Consolidation Road Map for NBFIs unveiled by the Central Bank Roadmap was designed to broad base the capital structure of the sector and therefore addressed only one aspect of the problem facing NBFIs.
“What is required is to create stable NBFIs with strong balance sheets, better efficiencies, improved operational costs and far greater financial inclusion and also inculcate better norms of governance among the NBFIs; these are much broader reforms than those proposed in the 2013/14 Central Bank Road Map,” the committee has stressed.
Additionally, the decision to consolidate should be driven by the entities themselves and the timelines given for consolidation should be expanded to give a more realistic timeframe, it added.
