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CB says commendable progress so far in financial sector consolidation

Sep 25, 2014 3:22:44 PM - www.ft.lk

The Central Bank on Wednesday said that the much-needed financial sector consolidation has so far progressed commendably and expressed confidence the process would be completed as per original timelines.
“From the inception of the financial sector consolidation program in January 2014, the progress made so far by the banks and Non Bank Financial Institutions (NBFIs) is commendable,” Central Bank’s Assistant Governor C.J.P. Siriwardana said.
As of mid-September 2014, eight banks and 29 NBFIs have confirmed their merger and acquisition transactions under the consolidation program while a few cash-strapped NBFIs are progressing under the restructuring process. In addition, four banks and four NBFIs are in the process of finalising their consolidation plans.
“The Consolidation Unit strongly believes that the Central Bank is in a position to meet the original time plan set for end 2014 for the completion of the consolidation process,” said Siriwardana, who delivered the Central Bank’s 64th anniversary oration titled ‘Financial sector consolidation: Why and how’.
Siriwardana, who also heads the Consolidation Unit, listed six reasons why the initiative was needed. One was the rapid transformation of the domestic economy and the need for a strong and stable financial system to steer future economic growth. The second reason was the necessity of maintaining stability in the local financial system amidst the growing complexity in the global financial system.
He said that third reason was the avoidance of any possible financial distress and fourth was the need to address the fragmentation issue in the financial sector. The other two reasons were the need to reposition the financial sector for delivering a cost-effective service and improving compliance and governance in the financial sector.
“Our financial sector consolidation program is forward-looking and designed to monitor, identify and track the sources of systemic risk over time to ensure financial system stability,” emphasised Siriwardena in his oration, which was attended by Central Bank Governor Nivard Cabraal, members of the Monetary Board, heads of financial services institutions and business leaders.
“This program will change the financial landscape of the country by transforming the financial institutions to be stronger and more resilient institutions, which can support the expected quantum leap of our economy,” he added.
He said that consolidating a diverse group of financial institutions was a very complex process and a challenging task.
The country’s banking sector constitutes 34 banks, of which 22 are domestic banks and 12 are foreign banks. The assets of the banking sector amount to approximately Rs. 6.3 trillion with only five banks, each maintaining an asset base of over Rs. 500 billion, accounting for a share of 66%.
Meanwhile, six medium size banks, including two foreign banks, hold assets between Rs. 100 and 500 billion, accounting for a share of 23%. The balance 23 banks individually hold assets less than Rs. 100 billion and account for only %.
The non-banking sector is highly fragmented and constitutes 58 NBFIs, of which 48 are Licensed Finance Companies while the remaining 10 are Specialised Leasing Companies. The total assets of the NBFI sector amount to Rs. 750 billion.  Similar to the structure of the banking sector, 13 large NBFIs, each holding assets over Rs. 20 billion, account for 74% of the NBFIs market share. Meanwhile 13% of the market share is accounted for by eight NBFIs holding assets between Rs. 8 and 20 billion. The remaining 37 small companies, each holding assets less than Rs. 8 billion, account for only 13% of the NBFI sector.  “Since the fragmented financial system is highly vulnerable to external shocks, consolidation would help to build a strong and stable financial system,” Siriwardana stressed. He said that the Central Bank has followed a very novel model in reforming the financial sector in a non-crisis environment, which gives us the comfort to resolve these complex issues smoothly.
“Today, our program has gained commendable recognition from local as well as international agencies including the IMF, World Bank, ADB and international rating agencies. The success of this financial sector consolidation is entirely dependent upon the proper planning, appropriate guidance, coordinated execution, uninterrupted support from all stakeholders and the extensive awareness campaigns conducted to educate all stakeholders including the general public,” he added. “We are now in the middle of the consolidation program and the Central Bank intends to complete the program by end March 2015. However, considering the complexity of the merger and acquisition models of some companies, flexibility would be granted on a case by case basis to ensure smooth transition,” Siriwardana said.