Banking and finance sector undergo significant changes

Sri Lanka’s banking and finance sector will undergo significant changes next year following the replacement of the specialised bank licence with commercial licences and introduction of mergers of licensed finance companies.

The banking sector has been directed to get ready for necessary changes in the current banking industry landscape under the new Banking Act which will come into effect in 2021, Central Bank ( CB) sources divulged.

Under the new set up, the CB will be gaining more power to impose fines on delinquent licensed banks and financial institutions. A resolution framework will be introduced by the CB which will get the teeth to impose monetary penalties/fines, ring-fencing of banks to mitigate risk.

The main areas proposed in new Banking Act include an overall mandate for supervision and regulation and a differentiated regulatory framework to facilitate proportionality, strengthening corporate governance, consolidated supervision,

It has provisions for strengthening of mergers, acquisitions and consolidation, subsidiarisation of large foreign banks and inculcating company structure for banks, a senior Finance Ministry official said.

A common banking licence for both licensed commercial banks and specialised banks would be introduced in accordance with the provisions of the Act, he added.

Licensed specialised banks with limited foreign exchange transaction capacities have no authority to open current accounts for customers.

They cannot deposit surplus liquidity or borrow through the CB overnight window, he said.

Six licensed specialised banks and 26 licenced commercial banks are operating in the country.

The licensed specialised banks are National Savings Bank, Sri Lanka Savings Bank, Housing Development Finance Corporation Bank, State Mortgage and Investment Bank, Regional Development Bank and Sanasa Development Bank.

The new Act is transforming licensed specialised banks into licensed commercial banks in order to

increase financial system stability, as specialised banks currently adhere to lower risk capital adequacy requirements.

The reforms in the non bank financial institutions include voluntary mergers, ownership limits for licensed finance companies and a comprehensive resolution framework for all financial institutions among other changes.