Government raises taxes on banks and financial institutions to stimulate economic growth

The government will raise taxes on banks and financial institutions in a 2014 budget proposal with the aim of achieving growth targets but bankers and finance company heads say that it will affect their profits.

A 2 percent nation-building tax (NBT) will be extended to banks and financial institutions and it will have an impact on the profits of banks and financial institutions a senior banker said.

He added that the banks and financial institutions will have to pass the new tax on to customers.

Rajiv Gunawardena ,Chief Executive Officer / Director of Asia Asset Finance Limited said that “since we are having almost 50 Finance companies in the country, encouraging for mergers and Acquisitions through concessions and regulation is a good move provided there is efficient and effective involvement from the regulators.

It will pave way for better synergies and better cost controls. However M&A are a challenging process, indepth analysis and studies should be done before any conclusions are made, and there should be a clear business model with right fundamentals in place, otherwise a failure of M&A could be costly. Further with M&A in the finance industry there could be reductions in the number of Job opportunities available in the industry and could create monopolies in certain segments” he added.

Meanwhile the Central Bank has said that the several measures proposed in the Budget 2014 to strengthen the licensed finance companies, where, with a view to encouraging consolidation in the financial sector, tax incentives have been offered for the strengthening of finance companies.

“In this regard, in keeping with the proposal articulated by the. Minister of Finance, the Central Bank would issue guidelines in relation to the merger and consolidation of finance companies, at the time of the release of the Central Bank Road Map 2014 and Beyond, on 2nd January 2014,” a statement by the regulator said.

It added that these new measures would be in addition to the series of measures taken by the Central Bank since 2009, where finance companies that were facing liquidity constraints have undergone restructuring processes under the supervision of the Central Bank. Such restructuring schemes included the appointment of Managing Agents, Restructuring of balance sheets, and the Infusion of capital by new investors.

The Central Bank also introduced a liquidity support scheme from the Deposit Insurance Fund in September 2013. “As a result, the finance companies facing liquidity constraints are now conducting normal business operations and the new measures are expected to strengthen those companies further,” the statement said.