Singapore, Mar 18, 2016 (LBO) – The path towards Sri Lanka’s bank conslidation is being reviewed, and a course correction is taking place, Central Bank Governor Arjuna Mahendran told the Sri Lanka Investment Summit, organized by FinanceAsia, this week.
“The principle concern of the current government is that that consolidation was predicated too much on the infusion of government capital into privately owned banks, which we think was not the correct way to proceed,” he said.
“We would rather have private capital drive that process of consolidation, so there is a course adjustment taking place.”
In 2014, just five banks had asset bases of over 500 billion rupees. Four banks had less than 50 billion rupees in assets each.
Mahendran said recent policy has been consistent, calling consolidation desirable — many Sri Lankan banks needed larger capital bases in order to absorb risk and engage more thoroughly in the development process.
“We don’t want to have the entire banking system to be government dominated, and that’s a bad way to consolidate.”
“Now that you have large equity stakes in private banks, the current government has to find a way to unwind these positions and make space for private capital to come in,” he said referring to stakes owned by the state pension and insurance funds.
Sri Lanka is still a capital deficient country, with insufficient savings to drive this process, he added.
“This is why the government is taking a measured pace in examining the issue, and then working out a plan on conslidation which will be openly announced in the next six months.”
He said Sri Lanka’s banking system was stable, and there are plans to be in conformity with Basel III reforms by 2018.
Basel III would strengthen regulation, supervision and risk management to improve the ability to absorb shocks arising from financial and economic stresses.
“They are having a very robust debate within BIS on how risk-weighted assets should be calculated and such like, and we are part of that dialogue,” said Mahendran.
With Basel III, banks would conduct more rigorous credit analyses of externally rated securitisation exposures, and have higher capital for trading, derivatives activities, and complex securitisations held on the trading book.