Sri Lanka’s Central Bank has made peace with the primary dealer fraternity on a hike in capital requirements from July, but players say the move still leaves them short changed. Sri Lanka’s Central Bank has made peace with the primary dealer fraternity on a hike in capital requirements from July, but players say the move still leaves them short changed. Primary dealers – are an elite group appointed by the Central Bank to exclusively access primary treasury bill and bond auctions.
Starting July 1, 2005 primary dealers’ minimum capital requirement will go up to Rs. 250 mn from Rs. 200 mn. The figure goes up to Rs. 300 mn from July 1, 2006.
The Central Bank had earlier asked dealers to raise minimum capital level to Rs. 350 mn from July 1.
However, Central Bank has backed off a bit and will push ahead with a risk weighted capital system – modeled on similar lines like commercial banks – for primary dealers from July 1, 2006,
“It’s a win-win situation for both parties. We arrived at a compromise after a committee was appointed to iron out differences,” says W A Wijewardene, Deputy Governor Central Bank.
“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 told LBO.
But the upside is not so simple.
Off the record dealers, are not happy with an increment, which comes in the midst of volatile interest rates. They allege raising capital during bad times, 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 dealers to carry bigger portfolio, if they are to remain profitable.
Players with state backing are not complaining. But others are feeling the pinch because equity capital does not come cheap.
One of the private banks, has indicated its desire to drop out of the race, if they are forced to pump in more capital.
There are currently eight bank dealers and four non-bank dealers.