The vehicle leasing business by the Licensed Commercial Banks (LCBs) is to be completely barred with effect from June 01, 2016 as the government considers it as a distraction to the normal banking business.
Further, compulsory lending limits were also proposed to be imposed on the LCBs to channel funds into economically-important sectors.
“I propose that licensed banks should concentrate on their core banking activities. The leasing business has become a distraction to core banking functions, and as such banks should cease in engaging in leasing business from June 01, 2016,” Finance Minister Ravi Karunanayake said yesterday, presenting the first budget of the national unity government and the 70th of the country. While lending caps on certain asset classes such as real estate are not unusual by central banks world over, issuing directives completely taking out a business segment could be deemed draconian and anti-competitive.
While clamping down on vehicle financing market was largely expected, yesterday’s budget proposal came as a complete surprise to the bankers.
The 70 percent Loan-To-Value (LTV) ratio on vehicle financing will also come in to effect from December 01, 2015.
While the exposure of many banks to leasing is below 10 percent of their total loan book (except Nations Trust Bank PLC which has 25 percent exposure), the enforcement of this budget proposal would significantly dent the bottom-lines and the growth of the banking sector, particularly in the case of smaller banks.
Banking sector mergers resurface, slew of marriages between small state banks
The national unity government following the footsteps of the previous regime is advocating mergers and acquisitions (M&As) in the country’s banking sector, in a “voluntary” form, allowing shareholders to decide the best course of action.
The Lankan banking sector is overcrowded with 32 banks.
“Given that our banking sector comprises a few large systemically important banks and a few smaller banks, we encourage voluntary mergers of banks that will result in stronger balance sheets, which in turn will enable better ratings and wider access to markets both domestic and foreign,” Finance Minister, Ravi Karunanayake said.
However, Karunanayake stressed that banks entering into possible M&A negotiations should not lay-off even a single employee, reminding the politically-popular measures followed by the past regime.
“I reiterate that such mergers should be carried out while ensuring the job security of all related staff.”