Banking sector consolidation resurfaces as capital requirements double

In what appears to be an apparent attempt to push the banking industry to consolidate, the Finance Minister yesterday proposed to double the minimum core capital level of the banking sector to Rs.20 billion from the current Rs.10 billion. 

Presenting his third budget since coming into power, Ravi Karunanayake expressed his desire to have a well-capitalized banking system which has the scale and the potential to secure funds from diversified sources and fund large-scale projects in both public and private sectors. 
“Such consolidation of banks will enhance the size of the banks, facilitate the fund raising from diversified sources, enhance risk taking capacities and enable banks to participate in large state and private sector projects to a greater degree than at present and derive scale benefits with regard to operational costs,” Karunanayake said. 

In response to the Central Bank circular issued in December 2014, when the financial sector consolidation plan was in motion under the previous regime, Sri Lanka’s banks were required to double their minimum core capital level from the then Rs.5.0 billion to Rs.10.0 billion by January 01, 2016.  While a large majority of banks had the required capital, few small and mid-sized commercial banks which did not have the capital had to seek Central Bank approval to get a deferment to the timeline.  Sri Lanka has 25 licensed commercial banks – 13 domestic and 12 foreign for a population of 
21 million.  

However, Australia, a country with a similar population has only four banks. 
Apart from the need to have well-capitalized larger banks, Karunanayake also appears to believe that the consolidation of the banking sector could be beneficial in the long run as the enhanced capital adequacy requirements under the BASEL III capital rules come into full effect from early 2019 onwards. 
Further, the actions will also be initiated to amalgamate the HDFC Bank and State Mortgage and Investment Bank (SMIB) to create a large housing bank, and the government will allocate Rs.7.5 billion as equity. 
Meanwhile, the budget also proposed to increase the minimum capital requirement for licensed specialized banks up to Rs.7.5 billion and primary dealers to Rs.1.5 billion. 

Single shareholder limit and directors’ board tenor to be reviewed 

The government also proposed to review the maximum stake held by a single shareholder in a bank which currently stands at 10 percent. 
Although the stipulated single shareholder limit is 10 percent, a party can increase it up to 15 percent with special approval from the Central Bank. 

Nevertheless, there are a few exceptional occasions where some shareholders own even beyond 15 percent under extraordinary circumstances. 
Union Bank of PLC, Nations Trust Bank PLC, Hatton National Bank PLC and Pan Asia Banking Corporation PLC are few of such cases in reference.  
Meanwhile, the maximum tenor of a director in a bank’s board which is now restricted to 9 years is also expected to be reviewed. 

“We will revisit these policies in view of the proposed consolidation of banks,” Karunanayake said.    

Vehicle financing further restricted 

In a bid to make the vehicles less affordable, the Finance Minister proposed to bring the existing 70 percent Loan-To-Value (LTV) ratio on vehicle financing further down, based on the vehicle category. 
To this end, he proposed to reduce the LTV on three-wheeler financing to 25 percent while for motor cars and vans 50 percent. 

However, for commercial vehicles such as lorries and heavy vehicles, the LTV was raised up to 90 percent. 
Leading up to the budget, the bankers feared the government would restrict leasing facilities below Rs.15 million.