Sri Lanka’s Central Bank has made peace with the primary dealer fraternity on a hike in capital requirements

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.

Upcoming
changes for primary dealers (PD):


  1. To increase the minimum capital requirement of PDs from
    Rs. 200 mn to Rs.
    250 mn
    from July 1, 2005 instead of Rs.
    350 mn as per Central
    Bank direction on November 28, 2003 and to increase the
    minimum capital requirement from Rs.
    250
    mn to Rs. 300 mn effective from July 01, 2006.


  2. To introduce Risk Weighted Capital Adequacy Framework (RWCAF)
    with a level of Rs.
    300 mn minimum capital
    commencing July 01, 2006.


  3. To allow PDs who maintain a capital between Rs.
    250 mn – Rs. 300 mn to
    declare 25% of profits as dividends.


  4. To require PDs to allocate a minimum of 25% of profits
    to capital even after meeting the minimum capital requirement of Rs.

    300 mn to strengthen capital base further with
    developments of the government securities market.


  5. To allow PDs to maintain up to a maximum 50% of Tier–I
    capital as     Tier-II capital.