Bigger Banks

Feb 22, 2009 (LBO) – Sri Lanka’s banking sector is not at risk from the global credit crisis but needs consolidation to be able to improve returns and attract fresh capital, a senior banker said. Clearer regulatory guidelines were needed to cover changes in ownership in the banking sector and to handle the implications of mergers and acquisitions, said Nihal Welikala, Advisor, National Development Bank.

The industry is over-banked and saddled with high costs, especially for distribution, that prevents the optimisation of economies of scale.

This was making it difficult to attract new investments into the sector.

“Banks need capital,” Welikala told a seminar on Sri Lanka’s response to the global economic crisis organised by the Institute of Policy Studies, a think-tank.

“Investor reluctance to invest is because of the lack of scale of individual banks.

“So mergers and acquisitions need to happen in order to build capital and absorb unforseen losses and reduce fixed costs,” Welikala said.

Claims that Sri Lanka is ‘over-banked’ however contrasts sharply with claims that ‘access to credit’ is low and interest margins in the sector is too high, which is indicative of