Watchdog Or Lapdog?

• Sri Lanka’s Financial Sector Stability Hangs In The Balance

by Santhush Fernando

Sri Lanka’s finance industry stability is reliant upon the genuineness of the officials attached to the country’s banking watchdog – the Central Bank of Sri Lanka (CBSL) opined a former veteran banker.

“As a person who was appointed immediately in the aftermath of the collapse of the Ceylinco Consolidated I personally know that there are many corrupt officials within the watchdog institutions,” lamented Janaka Ratnayake – Chairman of Trillium Property Management & Services who was one-time Chairman of the Merchant Bank of Sri Lanka (MBSL), which was appointed by the Central Bank to resurrect many failing finance companies.

Many good governance activists are of the view that if corrupt officials  attached to the regulator are not dealt with along with corrupt officials of banks and finance companies as white collar criminals, Sri Lanka would never be able instill governance into the corporate sector.

“This is all because of the fault of the Central Bank. We have overwhelming evidence of similar malpractices and we will publicize them in due course exposing corrupt officials,” Convener of the Voice Against Corruption Movement and President of the Inter Company Employees Union (ICEU) Wasantha Samarasinghe earlier told The Sunday Leader.  (See http://www.thesundayleader.lk/2016/09/05/rajapaksa-era-ghosts-continue-deadly-haunt/)

In May 2009, in the aftermath of the collapse of the Ceylinco Consolidated, the  Central Bank of Sri Lanka entrusted the restructuring efforts of The Finance Company (TFC) to the MBSL which was earlier appointed as the managing agent of Ceylinco Group’s Finance and Guarantee Company and the Ceylinco Savings Bank. In April 2009 MBSL  also acquired ABC Insurance Company Limited, a subsidiary of the ABC Group.

In 2015, the financial sector showed improved performance, reflecting the underlying economic performance and supportive prudential regulatory measures, which has led to further strengthening the financial system stability of the country. The improved performance was reflected in leading indicators of financial institutions, financial markets and payment and settlement systems.

As regards the financial institutions, the banking sector total assets increased by 15.9 per cent in 2015, against the 17.3 per cent growth in 2014, to record Rs. 8.1 trillion at the end of the year, while the off-balance sheet exposure showed a growth of 8.1 per cent to reach Rs. 3.4 trillion. Increased rupee lending activities of domestic banks, funded mainly through customer deposits, was the key of the asset growth.

Assets quality of the sector improved further in 2015 as reflected by the non-performing loan (NPL) ratio falling to 3.2 per cent at the end of 2015 from 4.2 per cent in 2014. The operating profits showed a growth of 10.3 per cent and profitability as measured by Return on Assets (ROA) and Return on Equity (ROE) at levels in previous year.

The Statutory Liquid Assets Ratio (SLAR) of the domestic banking sector at around 33 per cent continued to be much higher than the minimum statutory requirement of 20 per cent. Along with the growth in total assets, the total risk weighted capital adequacy ratio (CAR) of the sector declined to 14.2 per cent at the end of 2015 from 16.6 per cent in 2014.

The licensed finance companies (LFCs) and specialized leasing companies (SLCs) sector showed 22.3 per cent sharp growth in its total assets to Rs. 996 billion at the end of 2015 with improved assets quality reflected in the NPL ratio, which decreased to 5.7 per cent from 6.9 per cent in 2014. The sector operated with lower market risk exposure and healthy levels of liquidity.

As regards the profitability, sharp increase in operational costs during the year affected the ROA and ROE of the sector, which decreased marginally by 10 basis points and 170 basis points, respectively, to 3.0 per cent and 12.3 per cent, respectively. Total CAR of 11.2 per cent of the sector at the end of 2015 was a decrease from 13.5 per cent in 2014. The primary dealer industry showed 44.7 per cent growth in total assets and moderate increase in profit levels. The growth in contractual savingsinstitutions sector secured a reasonable return as revealed mainly by the return on investments of 11.3 per cent of the Employees’ Provident Fund (EPF) and 9.3 per cent of Employees’ Trust Fund (ETF) in spite of the low market interest rates. Other non-banking financial institutions also recorded growth but mixed operating performances given their business models and the financial market conditions prevailed.