Banking Industry Consolidation

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Banking Industry Consolidation

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  • 1

    Master Plan on Consolidation of the Financial Sector

    Presented by Ajith Nivard Cabraal

    Governor, Central Bank of Sri Lanka 17 January 2014

    CENTRAL BANK OF SRI LANKA

    Indicator Unit 2000 2005 2013 (Est/Proj) Remarks Real GDP Growth (Avg. for 5 years ending)

    % 5.0 4.0 6.7 Substantially higher growth

    trajectory

    GDP US$ mn 16,596 24,406 67,374 176% increase in 8 years!

    Unemployment % 7.6 7.2 4.5(1H) Steady progress

    Inflation (Annual Average) % 6.2 11.0 6.9 Almost 5 years at single digit levels

    Current Account Deficit % of GDP 6.4 2.7 3.9 Satisfactory progress being made

    Tourist Arrivals 000 400 549 1,274 Remarkable increase after the

    conflict

    Remittances US$ mn 1,160 1,968 6,650 Steady y-o-y growth, & 237%

    increase in 8 years

    FDI Inflows US$ mn 175 272 1,459 Steady growth

    Gross Official Reserves US$ mn 911 2,735 7,216 Consistent improvement and

    steady progress Months of Imports 1.5 3.7 4.5

    Exchange Rate (End Period) Rs./US$ 80.06 102.12 130.75 Stable levels maintained

    Budget Deficit % of GDP 9.5 7.0 5.8 Important progress towards fiscal

    consolidation

    Public Debt % of GDP 96.9 90.6 78.0 Moving steadily towards greater

    sustainability

    Broad Money Growth (M2b) % 12.9 19.1 16.0 Close to projected levels

    Private Sector Credit Growth % 11.8 21.5 8.0 Adequate and sustainable

    Stock Market Capitalisation Rs. bn 88.8 584.0 2,459.9 Reflects peace dividend and

    corporate sector vibrancy

    Over the past 8 years, substantial progress has been achieved in all macro-fundamentals

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    The Country's Per Capita Income has risen sharply, and is projected to increase well

    beyond US$ 4000 by 2016

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    A sound medium term macroeconomic framework is projected over the next several years

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    The following potential risks could pose challenges to the above projections: Uncertain weather conditions Geopolitical tensions Unwinding of accommodative monetary policies in advanced economies Slower growth in global demand

    Indicator Unit 2013 (Est) Projections

    2014 2015 2016

    Real Sector and Inflation

    Real GDP Growth % 7.2 7.8 8.2 8.5

    Total Investment % of GDP 31.0 32.0 32.5 33.0

    GDP Deflator % 7.0 6.0 5.5 5.0

    Headline Inflation % 4.7 5.0 4.5 4.0

    External Sector

    Trade Balance % of GDP -12.8 -11.6 -10.2 -8.4

    Current Account Balance % of GDP -3.9 -2.4 -1.0 0.1

    Overall Balance US$ mn 990 1,500 1,750 3,700

    Fiscal Sector

    Current Account Balance % of GDP -0.5 1.1 1.6 2.3

    Overall Balance % of GDP -5.8 -5.2 -4.4 -3.8

    Government Debt % of GDP 78.0 74.3 70.6 65.0

    Monetary Sector

    Broad Money Growth (M2b) % 16.0 14.0 14.0 14.0

    Private Sector Credit Growth (in M2b) % 8.0 16.0 17.0 17.0

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    Going forward, the Central Bank is also preparing plans to ensure that the country will avoid the possible Middle Income Trap

    By 2016, Sri Lanka will graduate to the Upper Middle Income category as per international classification

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    As some countries have stagnated at this middle income level, Sri Lankas medium term macroeconomic strategy will need to focus on avoiding this Trap as well

    * Estimate for 2013

    To deliver the envisaged results, the twin objectives of the Central Bank have to be secured

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    To achieve financial system stability, Monetary Law Act, Banking Act and Finance Business Act provide for directions to be issued to banking

    institutions with a view to protecting the public against any

    mismanagement, bank failures and loss of public confidence

    The Exchange Control Act, Payment and Settlement Systems Act, Prevention of Money Laundering Act, Convention on Suppression of

    Terrorism Financing Act, and Financial Transaction Report Act also

    provide additional regulatory and supervisory powers to the Monetary

    Board

    This stability outcome was re-iterated by His

    Excellency the President in his Budget Speech on

    21 November 2013

    The Central Bank is charged with the duty of securing:

    a) Economic and Price Stability; and

    b) Financial System Stability

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    Maintaining single digit inflation for nearly 5 years has given the Central Bank confidence that price stability will be secured in the future

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    bb

    2014 Between 4% and 6% 2015 & 2016 Between 3% & 5%

    Going forward, Sri Lanka will also require a strengthened financial sector, which can steer the country towards continued financial system stability

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    Accordingly, over the next few years, the financial sector will be actively encouraged and supported to move towards a new vision

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    The Central Banks policies will be forward looking and designed to balance potential worldwide policies and adjust to sudden volatilities, and to pre-empt , as much as possible, any possible financial distress and/or any possible failure in the future

    Adequate capital and other buffers will be put in place to prepare the Sri Lankan financial sector to withstand business cycles, without sacrificing investment potential during periods of global economic downturn

    The Central Banks role will be that of a pragmatic systemic risk mitigator, and a guide that encourages innovation in order to ensure the overall goal of financial system stability

    The failures of the past were costly and painful

    During 1988-90, 13 Registered finance companies failed; 2 such companies were revived by new investments; 11 companies were liquidated.

    In 2002, a Bank failed; It was only in 2007 that the deposits of that Bank were transferred to a new Savings Bank

    In 2009, 8 NBFIs faced liquidity problems, mainly because of the collapse of a related company in a particular group; Those NBFIs were gradually revived under restructuring processes, as agreed with the Central Bank

    In 2013, an NBFI faced liquidity problems due to certain directors of that company siphoning out funds; the Central Bank started a process of restructure, although that has now been interrupted as a result of an stay order by Court.

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    In 1997, Malaysia realized the importance of consolidation and initiated a Merger Programme to consolidate the financial industry

    Within one year, the sector was strengthened and the number of banks and financial institutions was rationalized:

    By 1998, the number of finance companies was reduced from 39 to 8

    Today, all finance companies have been merged with commercial banks.

    By 2000, 50 out of 54 banking institutions were consolidated into 10 banking groups.

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    Singapore also consolidated its banks, leading to bigger and stronger banks whose interests were aligned to the long term interests of the economy

    In the early 2000s, Singapore launched its bank consolidation process, together with the liberalization of the banking industry.

    A major move in the local banking sector was the consolidation of the 6 local banking groups into the present 3 main local banking Groups (DBS, OCBC and UOB), thereby leading to the strengthening of the banks capabilities, building their management teams and enhancing operational effectiveness.

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    The move strengthened the economic viability of all banks,

    and provided Singapore with better services and a

    competitive edge in the region.

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    Other key ASEAN countries also followed this lead

    Indonesia has highlighted the importance of small banks consolidating to address their weak capital positions.

    The number of participants in Thailands banking

    sector is due to shrink from 14 to 5 as competition and cost cutting has promoted consolidation.

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    Sri Lankas present financial system now needs some structural changes to ensure that Banks & NBFIs are well positioned in the envisaged US$100 bn economy

    Consolidation in the banking and the NBFI sectors will have to take place, using the attractive tax concessions provided by the Government

    The regulatory framework will have to be re-designed to monitor the emerging business models of banks and NBFIs

    The regulatory regime will have to be strengthened, while encouraging diversification of sources of funding and business operations, including through foreign sources

    The risk profiles of banks and NBFIs will have to be identified and regulated in order to ensure overall stability of the financial sector

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    Banks and NBFIs account for 64% of the

    entire Financial System assets:

    Banks - 57% ; NBFIs - 7%

  • 8

    At present, only 5 domestic banks have asset bases of over Rs. 500 bn

    Assets size Number of

    Banks Capital (Rs Bn)

    Total Assets (Rs. Bn)

    Market share %

    Over Rs 500 Bn 5 172.3 3,891.0 66.3

    Rs 250 Bn to Rs 500 Bn 1 21.5 369.8 6.3

    Rs 100 Bn to Rs 250 Bn 3 45.0 540.7 9.2

    Rs 50 Bn to Rs 100 Bn 3 31.0 307.6 5.2

    Less than Rs 50 Bn 4 33.6 183.3 3.1

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    The small State-owned Banks with assets less than Rs. 100 bn account for just 2.6% of total assets of the Banking sector

    Assets size Number of

    Banks Total Assets

    (Rs. Bn) Market share

    % Capital (Rs Bn)

    Rs 50 Bn to Rs 100 Bn 1 79.7 1.4 4.3

    Less than Rs 50 Bn 4 68.1 1.2 12.9

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    Assets Size Number of

    Banks Total Assets

    (Rs. Bn) Market share

    % Capital (Rs Bn)