'Local bank consolidation mechanism, a vital need'


Vajira Kulatilake


By Hiran H.Senewiratne

"The Sri Lankan banking sector is performing considerably well but to penetrate the regional level, a local bank consolidation mechanism is needed, like in Singapore and Malaysia, Chief Executive Officer, Investment Banking Cluster, NDB Capital Holdings Vajira Kulathilaka said.

"The banking sector is an important sector in the national economy and in today's context it is not easy to take a risk due to Basel compliance. However, we could use other mechanisms, like the consolidation process, to expand not only locally but also regionally, Kulathilaka told The island Financial Review in an exclusive interview recently.

He said that when there is a consolation process in the banking sector, we would have few banks and those banks would have enough money to not only expand their operations at the local level but also at the regional level. "Therefore, the country needs some consolidation mechanism that would ensure a collaborative effort from all banks, without the need for forced consolidation by the government or the regulator, he said.

"At this juncture for Sri Lanka to become a regional financial hub a consolidation mechanism is the need of the hour, but it should not be a forced method, Kulathilaka added.

He said that with a few banks, we would have ample funds to go regional; therefore, consolidation requires larger lenders to identify potential partners – with a particular focus on smaller Non Banking Financial Institutions – and initiate mergers and acquisitions (M&A).

Fitch Ratings-Colombo/Singapore reported recently that Sri Lanka must have a plan to bring about financial sector consolidation, in a strong statement of intent of raising systemic stability and boosting long-term economic development.

If effective, the "Master Plan for the Consolidation of the Financial Sector" would improve the credit profile of financial institutions, strengthen franchises, and reduce the supervisory burden, Fitch sources said.

Top five banks already account for two-thirds of system assets, and the system could become more concentrated. The authorities wish to build up at least five major banks with an asset base of more than Rs 1 trillion (USD7.7bn) within a "reasonable" period.

Only one bank met this threshold at end-September 2013. The government intends these institutions to be able to eventually establish a regional presence and improve overall access to funds.

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