Central Bank likely to direct banks to double capital

With the newest BASEL regulations lifting the bar higher for minimum capital, Sri Lankan banks are set to face another challenge as the country’s banking regulator is planning to double the minimum capital required for a licensed bank, Mirror Business learns. 

The minimum core capital, which mainly comprises of shareholder funds and retained earnings, is set to go up from the current Rs.10 billion to Rs.20 billion by 2020, and the Central Bank is likely to issue a circular to this effect shortly, leaving with a transition period of 2-3 years before full compliance. 
Hence, this requires the banks to continue to tap shareholders for fresh equity unless the annual profits could bridge the gap between the actual core capital and the regulator required minimum capital. 

While the larger and some of the mid-sized lenders are already in compliance with the Rs.20 billion minimum core capital requirement, the smaller banks will have to go behind their shareholders, who have already pumped in a billion of rupees in fresh equity in order to meet the Central Bank’s earlier minimum capital requirement of Rs.10 billion as core capital. 

Promoters of Cargills Bank Limited, a private lender with assets of Rs.16.0 billion, infused over Rs.5.0 billion in fresh equity last year just to meet this requirement while Pan Asia Bank PLC and Amana Bank PLC also raised Rs.2.0 billion and Rs.4.5 billion respectively this year to overcome the regulatory hurdle. 

According to a banking source, the Central Bank wants to have only a few larger banks with significant asset bases that can fund bigger projects in line with the rapid economic development projected for the country during the medium term. 

“Therefore they (the Central Bank) are indirectly coming to sector consolidation again”, he said asking not to be named. 

The doubling of the minimum core capital of banks up to Rs.20 billion was first proposed in the budget 2017 by the then Finance Minister Ravi Karunanayake but the Central Bank officials never pursued the matter as the industry was then bracing for BASEL III accord’s higher capital levels. 

BASEL III rules came into effect in July 1, 2017 and the Central Bank may be of the opinion that now is time to announce the next set of minimum regulatory capital requirement for the banks. 

Although this does not come as a complete surprise, some small lenders have still not even met the earlier directive issued by the Central Bank in December 2014 for Rs.10 billion core capital.

The matter for raising the regulatory minimum capital is said to have been discussed extensively at the Central Bank and it is expected this could be proposed at the forthcoming budget to give the banks enough transition time.  

Sri Lankan banks have already started raising money through rights issues and convertible debt to stay in line with the BASEL III capital requirements. 

Hence, the new development might prompt the banks to ramp up their capital raising efforts to satisfy both the BASEL III as well as the regulator. 

However BASEL III capital and regulatory minimum capital are not mutually exclusive as each requires continuously higher capital. 

“So, through this, I believe what the Central Bank is trying to do is to make the banks well prepared for higher capital adequacy requirements under BASEL III”, a banking industry official said.

In any case, the question remains if the banking sector investors are willing to pump in capital continuously with meagre returns and a lot of this capital will also stay idle without being able to generate an income. 

BASEL III and minimum regulatory capital make banks stronger by way of creating higher capital buffers in case of economic shocks such as the global financial crisis in 2007, where the world’s top lenders had to be bailed out by tax payer money.