Sri Lankan banks gear up to face capital adequacy challenges

Sri Lanka’s state owned banks will be limiting the dividend payouts, selling non - core assets and infuse capital by the government or international development agencies, informed official sources disclosed.

This recommendation was conveyed by the Prime Minister’s office to secretaries of the Ministries of National Policies and Economic Affairs and Public Enterprises Development recently.

In a letter sent by Prime Minister’s Secretary E.M.S.B. Ekanayake, it was explained that the banks in Sri Lanka would face several new challenges in the coming years.

Firstly they are required to comply with the new Basel 111 Capital regulations and the banks would need to ensure that they have the required capital to prevent being downgraded by credit agencies and facing higher risk premiums.

Secondly, they have to meet the challenge arising out of the Fintech revolution which will compete with traditional financial methods in the delivery of financial services.

Reducing government shareholding in private banks has been recommended as it was highlighted that the concentration of ownership and significant government ownership in these banks has an impact on the ability of private banks to raise capital.

The Central Bank Governor has been instructed to re- examine the ownership rules and to ensure that they are strictly applied to prevent a concentration of holdings.

With regard to the restructure of small banks, it was decided to further discuss the acquisition of Lankaputhra Bank by Regional Development Bank (RDB).

The Government will restructure five small state banks in an effort to make it not only stable and resilient but also competitive, official sources revealed.

The Public Enterprises Development Ministry has made a recommendation to the Cabinet Committee on Economic Management (CCEM) on the rationalisation of the activities of State Mortgage and Investment Bank (SMIB), Housing Development Finance Cor p o r ation ( HDFC) Bank, Lankaputhra Development Bank ( LDB), Sri Lanka Savings Bank ( former Pramuka Bank) and Regional Development Bank (RDB).

Measures will be taken to increase the critical mass ( capital and asset bases) to strengthen the viability and resilience as well as capabilities, including capacity to innovate of these five banks.

Operational effectiveness will also be enhanced by reducing overheads, particularly through branch rationalisation which served to reduce spreads.

In the rationalisation process, there won’t be ‘ forcible retrenchment’ of any staff member while a Voluntary Redundancy Schemes (VRS) will be offered.