Banks’ minimum capital bar raised; punitive action on non-compliance

The licensed banks operating in Sri Lanka yesterday received the widely expected directive from the Central Bank asking them to double their minimum capital or find merger partners as the regulator wants to see only a handful of larger banks in three years from now who can fund big-ticket deals.  
Through a directive the Central Bank yesterday informed the local licensed commercial banks to take necessary measures to raise their minimum core capital from the current Rs. 10 billion to Rs.20 billion within a period of 3 years. 

The local licensed commercial banks were the most affected by regular minimum capital enhancement requirements as they had to effectively double their minimum core capital every 5 years. 

In a 2010 circular, the Central Bank first asked them to increase their core capital up to Rs.5.0 billion. Then in a fresh disclosure in December 2014, the banking sector regulator asked the banks to double their capital base to Rs.10 billion by January 1, 2016.

This is the third directive on the same matter, which effectively quadrupled the banks’ minimum core capital within an 11-year horizon. 

“Enhancing minimum capital requirement will support the implementation of Basel III framework in Sri Lanka to strengthen the resilience of banks, and may lead to consolidation in the banking sector”, the Central Bank said in a statement, yesterday. 

Many mid and large licensed commercial banks are either on top of this threshold already or well on course to cross it, which will come into full force on December 31, 2020. 

However, the directive will decide the destiny of some of the small and mid-sized lenders as they have been given a clear choice between becoming a target of a larger bank or up their game to ramp up capital on their own.   

Out of the 13 local licensed commercial banks in Sri Lanka only one player is still behind even the current Rs.10 billion threshold for which they have time till January 1, 2018 to meet the requirement. Amana Bank PLC and Cargills Bank Limited recently concluded their capital raising exercises just to nudge their minimum capitals above the Rs.10 billion mark. 

These banks have already exhausted and milked their shareholders to the limit so that for them to go back to shareholders to raise funds for 2020 will be near impossible unless they show handy returns. 
However, the earnings potential of the banks depends largely on how fast they could lend and a wobbling economy and higher interest rates will not assist them in that regard.

The September quarter earnings season has just begun and the listed company results released so far haven’t been encouraging.

Although the banking sector has traditionally delivered consistent returns, they are also not immune to negative developments in the economy. Failure to comply with the latest directive will be met with punitive actions as such banks will be prohibited by the Central Bank from paying any dividend or repatriating profits. Further punitive actions will be taken on restricting asset growth and branch expansion unless proactive measures are taken to augment the capital.  

Meanwhile, the Central Bank has also upped the minimum core capital of licensed specialized banks to Rs.7.5 billion, effective the same date. 

Further, foreign banks operating in the country with assets up to Rs.100 billion are required to increase their capital to Rs.5.0 billion while those who operate with over Rs.100 billion assets are required to have a capital of Rs.10 billion by December 31, 2020.