CB unveils finance sector consolidation 'Master Plan'

Banks & large finance cos. encouraged to acquire 1 to 3 small firms Banks & large finance cos. can identify partners of choice till March 31 Deadline for acquisition plans falls May 31, 2014 Majority of small NBFIs are expected to be absorbed by Decemb

In line with one of its two main responsibilities—ensuring the financial system stability—the Central Bank on Friday presented a master plan to consolidate Sri Lanka’s overexpanded banking and finance sectors.

Under this new plan presented by Central Bank Governor Ajith Nivard Cabraal, the Central Bank expects to significantly trim down the number of banks and non-bank financial institutions (NBFIs) operating in the country.

Though no exact figure is mentioned, the Central Bank expects to pool the existing banks to create 5 large banks with asset bases of Rs.1 trillion each along with a large development bank through the merging of two existing development banks. However, the Central Bank expects to shrink the NBFI sector to 20 large companies from the current 58 through mergers and business absorptions.

In doing so, they have classified the existing 58 NBFIs into 3 categories based on three factors—asset base, core capital and compliance with Central Bank directives. About 19 individual NBFIs with more than Rs.8 billion asset base, over Rs.1 billion core capital and high degree of compliance with Central Bank directives were classified under Category A and, NBFIs which don’t fulfill one or more of the above criteria of Category A has been identified under Category B.

One NBFI currently at a standstill due to a stay order issued by the Court of Appeal in respect of a restructuring plan has been identified under Category C.

According to the Central Bank, local banks and Category A NBFIs will be encouraged to acquire and absorp1 to 3 of Category B companies.

“Initially, the local banks and Category A NBFIs will be given a time period until 31st

March, 2014 to identify partners of their choice from within the Category B NBFIs for such mergers/ absorptions,” the Central Bank said.

The plans for such acquisitions should be submitted by May 31, 2014 as the majority of Category B NBFIs are expected to be absorbed by December 2014, while any remaining are expected to be completed by first half of 2015.

If any Category B NBFI remains unabsorbed after March 31, 2015, the Central Bank said, it is considering such a situation a “possible threat” to the financial system stability and therefore they will issue directions to any bank or NBFI, directing such institutions to implement and/or undergo a suitable consolidation process, under the provisions of the Monetary Law Act, Banking Act or Finance Business Act. Meanwhile the Central Bank said firms of accountants with international connections and the Institute of Personnel Management have been invited to provide advice and guidance to banks and NBFIs, to assist them in this process.

“The required financial, tax and HR due diligence will need to be carried out by reputable firms, preferably with international expertise in such processes, while the purchase consideration must be based on sound internationally-accepted, market-based principles.”The payment of consultancy fees for necessary advice/guidance that will be provided by the consultants on accounting, tax, valuation of businesses, HR issues etc. in the merger and absorption processes will be met by the Central Bank. At the same time, through the Deposit Insurance & Liquidity Support Scheme, the Central Bank will provide capital infusions to acquiring banks or NBFIs on concessionary terms.

President Mahinda Rajapaksa announced tax concessions in the 2014 budget as he suggested giving “qualifying payment status” for acquisition expenditure of banks or finance companies.

“In the meantime, the Central Bank stressed that as a result of the envisaged mergers, staff member shouldn’t be forcibly retrenched and their salaries reduced. However the Central Bank said those involved in the merger/absorption process will be encouraged to appoint competent human resource consultants to perform independent reviews on senior management.