Central Bank appoints top level committee to look into the future viability of primary dealers

Sri Lanka’s Central Bank has appointed a committee to look into the future of primary dealers, after a move to raise their capital to Rs. 350 mn this June, sent minor tremours throughout the industry. Sri Lanka’s Central Bank has appointed a committee to look into the future of primary dealers, after a move to raise their capital to Rs. 350 mn this June, sent minor tremours throughout the industry. Headed by Assistant to the Governor A G Jayatissa, the committee will look at the future viability, tax implications and market development plans for the next three to five years.

Primary dealers – are an elite group appointed by the Central Bank to exclusively access primary treasury bill and bond auctions.

Dealers, who are annoyed over the decision to increase capital by Rs. 150 mn, say the move could leave out players who are committed to the business, but are unable to cough up with the cash.

The large capital infusion also forces a dealer to carry bigger portfolio, if they are to remain profitable.

Market players say an extra Rs. 150 mn on top of a Rs. 350 mn capital, ironically qualifies dealers to apply for a commercial banking licence!

Dealers are also alleging that the Central Bank debated the idea of a risk weighted capital model for nearly a year, with a promise to introduce it in 2005. But instead, the Public Debt Dept. issued a directive last month asking players to top up their capital by July 1, 2005.

Market players met Central Bank top officials on Thu to iron out differences in the hope of finding some common ground.

Central Bank’s Deputy Governor W A Wijewardene who chaired the meeting says some of the arguments put forward against the capital issue are not quite true.

“A risk weighted capital model is good, but our market has high volatility. A hike of 250 basis points within a short time could wipe out the entire capital based of a primary dealer, given their current portfolio. When that happens, they have to bring in new capital immediately and the current system is inflexible,” he said.

He shot down allegations that the bank had promised to move into a risk weighted model this year, saying that the issue was only debated at length.

In the interim, he says, the best way out is to raise capital.

The committee, which includes Public Dept Superintendent Chandra Premaratne, Additional Director Dr. W M Hemachandra, and four members from the Primary Dealers Association, are expected to submit their report in three weeks time.

There are twelve appointed primary dealers, which includes four non-bank dealers.

-LBO Newsdesk: LBOEmail@vanguardlanka.com