Banking Industry Consolidation

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Banking Industry Consolidation

Transcript of Banking Industry Consolidation

  • 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

    2

  • 2

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

    beyond US$ 4000 by 2016

    3

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

    4

    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

  • 3

    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

    5

    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

    6

    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

  • 4

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

    7

    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

    8

  • 5

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

    9

    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.

    10

  • 6

    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.

    11

    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.

    12

    The move strengthened the economic viability of all banks,

    and provided Singapore with better services and a

    competitive edge in the region.

  • 7

    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.

    13

    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

    14

    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

    15

    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

    16

    Assets Size Number of

    Banks Total Assets

    (Rs. Bn) Market share

    % Capital (Rs Bn)

    Rs 250 Bn to Rs 500 Bn 1 297.2 5.1 26.8

    Rs 100 Bn to Rs 250 Bn 1 107.3 1.8 16.0

    Below Rs 50 Bn 10 173.8 3.0 40.8

    12 Foreign Banks account for only 10% of market share,

    although many have been in operation in Sri Lanka for

    many decades!

  • 9

    The current NBFI sector, which is about 7% of the financial sector, is also dominated by just a few NBFIs

    17

    Assets Number of NBFIs

    Total Assets (Rs. Bn)

    Market Share %

    Capital (Rs. Bn)

    Over Rs 20 Bn 10 433.0 61.5 64.1

    Rs. 8 Bn to 20 Bn 7 97.4 13.8 8.5

    Less than Rs 8 Bn 40 169.3 24.1 3.5

    Under Litigation 1 3.8 0.5 0.1

    In this background, pre-emptive strategies are needed to establish a strong and dynamic banking and NBFI sector in the future...

    Capital will have to be increased in order to ensure that sufficient buffers are built during good times, to strengthen resilience of the financial sector

    The banking and NBFI sectors will have to be consolidated through mergers and absorption of businesses

    18

  • 10

    To ensure Financial System Stability, the expected outcome in consolidation is expected to result in a banking sector where

    At least 5 Sri Lankan banks will have assets of Rs. 1 trillion or more, with such banks also having a strong regional presence

    There will be a reduced number of banks as a result of mergers and absorptions

    There will be a large Development Bank that will provide a substantial impetus to development banking activities in the country

    Banks will rely on new and effective IT applications

    Banks will have substantially lower interest margins through increased efficiency and prudent management of assets and liabilities

    Foreign banks in Sri Lanka will demonstrate a greater participation in economic activities, and will be making significant contributions to the economy

    Domestic banks which had assets less than Rs.100 bn, will have assets of Rs.100 bn or more, through organic growth and merger/absorption with other banks/NBFIs over a reasonable time horizon.

    19

    and an NBFI sector where There will be about 20 NBFIs, of which around 3 would be specialized in

    Micro finance

    Each NBFI will have an asset base of over Rs 20 Bn

    NBFIs will have improved loss absorbency capabilities and enhanced resilience to internal and external shocks, due to the increase of the quality and quantity of capital

    NBFIs will be able to attract low cost, long term funds in the form of deposits and debt instruments

    NBFIs will have improved cost efficiencies in order to be competitive

    NBFIs will be able to diversify their business models and be ready to deal with market volatilities

    NBFIs will be able to manage risks in an integrated manner

    NBFIs will have improved governance, and fit and proper directors and senior management

    20

    Accordingly, the objective of merger/absorption plan would be to fashion an NBFI sector that comprises of a smaller number of large NBFIs, which are fully compliant with the Central Banks regulatory framework.

  • 11

    The two large state commercial banks, BOC and PB, will be encouraged to grow and expand towards a stronger regional presence, and to operate with higher levels of capital

    They will also be expected to strengthen their Off-shore banking operations, and be able to attract funds, as well as conduct private banking on a wider scale

    The NSB will be encouraged to broad base their banking activities to contribute to the economy on a larger scale

    The Pradeshiya Sanwardhana Bank will be encouraged to serve the niche market of microfinance, targeting inclusive growth in the provinces

    The other smaller state banks will be encouraged to merge with the bigger state banks or with one another, and play a more cohesive role, since at present these banks account for just 1.1% of the market share!

    21 The State Banks will be expected to contribute significantly towards building a strong and dynamic banking sector

    Foreign banks in Sri Lanka will be expected to demonstrate greater participation, and make a useful contribution to the economy

    Larger foreign banks will be expected to further strengthen operations

    Smaller foreign banks will be expected to develop new strategies to grow, and to increase participation in the domestic economic activities via:

    Expansion of the necessary skills

    Product development

    Display of greater enthusiasm: private banking, off-shore banking, infrastructure financing; support for 5 + 1 Hub activities

    22

  • 12

    The present 58 NBFIs will be identified as Category A, B and C in preparation for the consolidation

    NBFIs with : Assets more than Rs. 8 bn

    Core Capital more than Rs. 1 bn

    High degree of compliance with Directions issued by CBSL

    Category A

    LFCs or SLCs or Groups of LFCs and/or SLCs that do not fulfill one or more of the criteria of the Category A.

    Category B

    NBFIs where business is at a standstill. No action pertaining to the consolidation is possible due to the stay order issued by the Court of Appeal in respect of the restructuring plan

    Category C

    23

    19

    1

    38

    13

    35

    1

    The Consolidation Approach would be 24

    Local Banks and Category A NBFIs to discuss with Category B NBFIs and identify merger partners and agree terms and conditions for

    Mergers/Absorptions

    All Category B NBFIs to merge with local Banks or Category A NBFIs, or merge among themselves, so that they fulfill conditions of the

    Category A NBFIs

    In the event that a Category B NBFI requires a capital infusion by the acquiring bank or Category A NBFI as per a plan that is approved by

    the Central Bank, a matching support to the acquiring entity, via the

    Deposit Insurance & Liquidity Support Fund, would be provided

    The local banks and Category A NBFIs would be encouraged to acquire and absorb 1 to 3 Category B NBFIs

    Initially, the local banks and Category A NBFIs will be given a time period of until 31st March, 2014 to identify partners of their choice from within the Category B NBFIs for such mergers/absorptions..

  • 13

    All Banks and NBFIs will be expected to adhere to a rather focussed time-line...

    Consolidation/Merger Strategy Submission of the Plan of Action to

    Central Bank

    Target Date for Completion

    Merger of NBFIs within a Group

    31 March 2014 30 June 2014

    Merger/Absorption of Category B NBFIs by Banks or Category A NBFIs

    31 May 2014

    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

    Increase of minimum core capital of NBFIs to Rs. 1 bn

    31 December 2014 1 January 2016

    Increase of minimum core capital of NBFIs to Rs. 1.5 bn

    31 December 2014 1 January 2018

    25

    All Banks and NBFIs will be expected to play their role actively and effectively, to achieve the expected outcome as specified Local Banks and NBFIs will be required to submit broad plans

    by the date as specified for possible mergers/absorptions

    Foreign Banks to submit broad plans, by the dates as specified for the greater participation in the economy

    Merger/Absorption plans that are submitted by Banks and NBFIs would be evaluated and approved by the Central Bank

    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

    26

  • 14

    If it is observed that any Category B NBFIs may remain unabsorbed after 31st March 2015, the Central Bank may consider such a situation as a possible threat to financial system stability In such an event, the Central Bank will issue

    Directions to any Banks or NBFIs, 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.

    27

    In the merger/absorption process, the Accounting, Valuation, Tax, Human Resources and other due diligence practices will be supported 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 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, all Banks and NBFIs will be free to obtain any advice and/or guidance from any other source they prefer as well, at their own cost.

    28

  • 15

    The tax concessions and benefits proposed in the Budget 2014 are expected to facilitate the consolidation process

    The seriousness of the envisaged consolidation process is confirmed by having tax benefits provided in the Budget 2014.

    The exact details and implementation of such benefits are now being finalised with the Ministry of Finance and the Department of Inland Revenue, and will be notified soon.

    29

    In support of this initiative, I propose to give qualifying payment

    status for acquisition expenditure of banks or finance companies, if

    they have acquired any finance company.

    President Mahinda Rajapaksa, Minister of Finance & Planning

    21st November 2013 Budget Speech

    This merger/absorption process must not adversely affect the staff of the respective institutions No staff member is to be forcibly retrenched as a

    result of these merger/absorption processes

    No salary of any employee is to be reduced from that prevailing as at 31st December 2013.

    Those involved in the merger/absorption process will be encouraged to appoint competent Human Resource Consultants to perform independent reviews on senior management

    30

  • 16

    The capital infusion as a result of a merger or absorption of any Category B NBFI, in accordance with a plan as approved by the Central Bank during the process of merger/absorption, will qualify for funding support

    In the case of any capital infusion by the acquiring Bank or Category A NBFI as a result of a plan that is acceptable to the Central Bank, a matching long term advance will be made through the Sri Lanka Deposit Insurance and Liquidity Support Scheme, on concessionary terms.

    31

    The Central Bank will closely guide the merger/absorption process to ensure that it will be smooth and constructive

    Each Bank and NBFI must form a Steering Committee for this purpose.

    The relevant Banks/NBFIs must submit monthly reports on their progress re. the mergers/absorptions to the Central Bank

    Banks and NBFI sectors will be expected to align their immediate future business expansion, new recruitment and other capital expenditure in keeping with the new developments.

    A Special Unit of the Central Bank headed by an Assistant Governor, will liaise between all stakeholders to ensure the successful implementation of the merger/absorption process.

    The Central Bank will issue public notifications from time to time, to apprise the overall progress of the process

    The Central Bank will also liaise with other authorities such as Securities and Exchange Commission, Colombo Stock Exchange, Registrar of Companies, wherever such support is needed.

    32

  • 17

    In the meantime, banks capital will be strengthened significantly

    33

    Increase in minimum capital requirement for existing banks by 1st January 2016:

    Licensed Commercial Banks - minimum Rs. 10 bn Licensed Specialized Banks - minimum Rs. 5 bn

    Migrate to the advanced approach under the Basel II Capital Adequacy Framework by the implementation of Standardized Approach for calculating capital charge for operational risk under Pillar 1

    Adopt Basel III Capital Standards Increase in quality and quantity of capital of bank; Introduction of a capital conservation buffer with the

    intention of creating capital buffers in good times that can be used to absorb shocks in periods of stress; and

    Introduction of a counter-cyclical buffer to reduce pro-cyclicality to prevent excessive credit growth

    34

    The Risk Management Framework of banks will also be improved further

    Key Policy Measure Target Date

    Issue guidelines on the Stress Testing Framework During 1st Quarter 2014

    Implement the new Liquidity Risk Management Framework by the introduction of the Basel III

    Liquidity Coverage Ratio (LCR)

    In 2014: Supervisory Observation period In November 2014: Issue Direction to maintain minimum LCR effective from 1st January 2015

    Introduce a Regulatory Framework for Valuation of immovable Property of Licensed Banks

    During 1st Quarter 2014

    Introduce prudential requirements to regulate the exposure of the banking system to asset markets and other potential economic shocks and concentrations

    During 2014

  • 18

    35

    Several new Regulatory measures will be implemented in the banking sector

    Key Policy Measure Target Date

    Incorporate appropriate changes to existing regulatory framework in line with new accounting standards

    Introduction of the new off-site surveillance reporting system Amendments to existing Directions and other regulations

    From 2nd Quarter 2014

    Establish minimum standards for core banking systems and other IT based platforms used by banks

    During 2nd Quarter 2014

    Develop a comprehensive supervisory framework for consolidated supervision of banking groups

    During 2014

    Develop new Regulations on Liquidity Risk Management

    Framework for Valuation of Immovable Property of Licensed Banks

    Require banks to further strengthen The quantity and quality of capital to

    improve their loss absorbency capabilities

    The systems and processes to migrate to advanced approaches on the Basel II capital framework

    The management of banking risks in an integrated manner, and

    The governance, fitness and propriety of directors and senior management to establish operational accountability

    36 The new regulatory framework will continue to be in line with international best practices

    Adopt Standardised Approach for calculating capital charge for operational risk under Pillar 1 in compliance with Basel II Capital Adequacy Requirement

    Issue guidelines to strengthen

    The Stress Testing Framework of the Banking Sector

    Minimum Requirements in Core Banking System of Banks

    Amend the Banking Act to take into account the new developments in domestic and international financial markets

    Supervision of bank dominated financial groups to be strengthened

    Provisions to facilitate mergers and acquisition of banks to be introduced

    Bank resolution measures to be strengthened

  • 19

    At the same time, the Central Bank will significantly enhance the level of regulatory action in the NBFI sector, as well Introduce a system of lower leverage ratios to NBFIs which are only partially-

    compliant with the Directions of the Central Bank

    Publish the maximum deposit levels for each NBFI on a quarterly basis, beginning 2Q, 2014

    Introduce a liquidity support fund for NBFIs which require short term liquidity support, by 2H, 2014

    Closely monitor the implementation of the proposed merger/absorption plan

    Strengthen the risk focused regulatory and supervisory system

    Use an online early warning system to identify emerging risks in an NBFI

    Impose penalties on, and/or disqualify from holding office, key management personnel when there are continued non-compliances of Central Bank Directions

    Expedite the investigation processes on unauthorised finance businesses

    37

    In this newly emerging scenario, certain marketing practices currently pursued by Banks & NBFIs will be discontinued

    Lottery schemes will be prohibited

    New guidelines will be issued on non-interest incentive schemes offered by banks to mobilize deposits

    Accuracy of disclosures on interest rates, fees and charges, etc. will be closely monitored

    The implementation of the current Directions on Customer Charter of banks will be enforced

    More focused attention will be given to customers complaints and consumer protection, so as to address grievances in an efficient and timely manner

    38

  • 20

    In the meantime plans are also underway to strengthen other areas of the financial sector, and these too, will be supported A deeper secondary market for Government Securities will be

    developed

    The e-trading platform will be extended, with two-way quotes made mandatory

    A Central Counter Party (CCP) System will be established together with SEC, CSE and Lanka Clear, and settlement of all G-sec transactions will be made only through such CCP

    Major improvements to the Payments & Settlements platform will be carried out in order to be prepared for the future

    Improvements in the national payment system including CCAPS will be facilitated and the participation of banks and non-bank service providers in developing payment and settlement systems, will be promoted

    The Securities and Exchange Commissions 10 strategy Capital Market Development Master Plan will be supported, whereever necessary

    The resulting outcome from all these initiatives will lead to a new equilibrium in the financial sector in Sri Lanka

    40

    Larger aggregate capital base

    Increased potential to finance large scale transactions

    Increased investments by foreign investors

    Improved level of efficiency and corresponding profitability

    Availability of a full range of financial services at affordable costs

    More effective supervision

    As a result of the merger/absorption process, all

    banks and NBFIs will emerge stronger, more

    resilient, and be better positioned to support the

    envisaged economic growth of the country

  • Communications Department 30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.

    Tel : 2477424, 2477423, 2477311

    Fax: 2346257, 2477739

    E-mail: [email protected], [email protected]

    Web: www.cbsl.gov.lk

    Press Release Issued By

    Date

    Central Bank of Sri Lanka initiates action on

    Consolidation of the Financial Sector Budget proposal

    As stated by His Excellency the President in his Budget Speech on 21 November

    2013, and as set out in the Road Map of the Central Bank of Sri Lanka on 2 January

    2014, in order to steer Sri Lanka towards the economic goals set for 2016 and

    beyond, a stable financial sector with strong and dynamic financial institutions has to

    be created. Accordingly, a Master Plan on the Consolidation of the Financial Sector

    to achieve such an outcome will be articulated by the Governor to the relevant

    stakeholders on Friday 17 January 2014 at the Central Bank. Thereafter, one-to-one

    discussions will be held with all banks and non-bank financial institutions so as to

    guide these institutions in accordance with the newly announced Plan. The Central

    Bank will also closely monitor and support the consolidation process in order to

    ensure that it will be smooth and constructive.

    In the meantime, the Central Bank requests all institutions involved in the process to

    ensure that there will not be any retrenchment of staff in banks and non-bank

    financial institutions as a result of this consolidation process, and to align their

    immediate future business plans, recruitment and capital expenditure, to be in line

    with the new developments that are to take place over the next few months.

    Communications Department

    13 January 2014

  • Communications Department 30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.

    Tel : 2477424, 2477423, 2477311

    Fax: 2346257, 2477739

    E-mail: [email protected], [email protected]

    Web: www.cbsl.gov.lk

    Press Release Issued By

    Date

    Satisfactory progress being made on Consolidation effort

    As already set out in the Road Map 2014 and beyond, the Central Bank conducted a

    seminar on 17 January 2014 to explain the need and the rationale for the Consolidation

    in the banking and non-banking financial institutions (NBFIs) beginning 2014. At such

    seminar, the key components of the Consolidation Plan were announced to the

    Chairmen and Chief Executive Officers of banks and non-bank financial institutions

    (NBFIs), key management of the audit firms which are eligible to audit banks and

    NBFIs, and representatives of the Institute of Chartered Accountants of Sri Lanka and

    the Institute of Personnel Management. Subsequently, the Central Bank senior

    management held one-on-one meetings with almost all boards of directors and senior

    management of the local banks and NBFIs, at which the expectations of the

    Consolidation process was further clarified and specific issues pertaining to particular

    institutions were discussed in detail. The Central Bank also informed the banks and

    NBFIs to approach the Consolidation process in a professional manner by seeking

    specialised IT, Legal, Tax and HR services in order to ensure the objectivity and

    integrity of the process. In addition, the Central Bank requested all banks, NBFIs and

    others who are involved in the process to continue a close dialogue with the Central

    Bank and obtain guidance if the need arises. In this regard, the members of the special

    unit headed by the Assistant Governor were introduced to the banks and NBFIs at these

    Communications Department

    31 January 2014

  • meetings. In keeping with the request of the Central Bank, banks and NBFIs agreed to

    submit their preliminary proposals re. the Consolidation effort by 31March 2014.

    A meeting was also held with key office bearers of the Ceylon Bank Employees

    Union, at which all clarifications sought were provided by the Governor of the Central

    Bank and other senior officials of the Central Bank. The Central Bank also held

    discussions with leading Consulting firms with regard to their provision of consultancy

    services in respect of valuations, accounting and other services. These meetings helped

    to provide a clear understanding of the process which will help all stakeholders to move

    forward with clarity and certainty.

    In the meantime, the Central Bank also wishes to inform the general public that the

    Consolidation process will not, in any way, affect their current transactions and deposits

    with the banks and finance companies, with whom they are presently transacting.

  • 1

    Communications Department 30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.

    Tel : 2477424, 2477423, 2477311

    Fax: 2346257, 2477739

    E-mail: [email protected], [email protected]

    Web: www.cbsl.gov.lk

    Press Release Issued By

    Date

    Financial Sector Consolidation Update - February 2014

    The progress in the consolidation effort has been satisfactory during the month

    of February 2014.

    Meetings with foreign bank representatives: One-to-one meetings took

    place with regional representatives and senior management of foreign

    banks at which the foreign banks agreed to play an increasingly active

    role in the economic activities of the country.

    Merger between National Development Bank PLC and DFCC Bank:

    In line with the joint announcement made in January 2014, the work is in

    progress to finalize the merger of the two banks.

    Due diligence: A framework for the carrying out of due diligence

    activities has been established, and the audit firms that are eligible to

    audit banks, finance and leasing companies (NBFIs) have commenced

    due diligence on the respective companies.

    Communications Department

    28 February 2014

  • 2

    Regulatory coordination: The Securities and Exchange Commission of

    Sri Lanka and the Colombo Stock Exchange have agreed to set up a fast

    track process to facilitate the expected consolidations.

    Tax related matters: The officials of the Ministry of Finance and

    Planning and the Department of Inland Revenue have agreed to deal with

    the tax issues that are expected to arise consequent to the consolidation

    process. They are also drafting the required laws to give effect to the

    proposals announced in the budget.

    Awareness programmes: CBSL officials participated at many

    knowledge sharing events on the subject of consolidation. These events

    have also provided opportunities to clarify certain matters raised by

    stakeholders.

    In the meantime, the Central Bank notes the positive sentiments re. the

    consolidation process and the resultant expectations of raising systemic stability

    and boosting long-term economic development, as expressed by International

    Rating Agencies. Further, the Central Bank welcomes the reaction of certain

    International Agencies that have conveyed their desire to provide advice and

    funding in the process of consolidation.

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    Communications Department 30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.

    Tel : 2477424, 2477423, 2477311

    Fax: 2346257, 2477739

    E-mail: [email protected], [email protected]

    Web: www.cbsl.gov.lk

    Press Release Issued By

    Date

    Financial Sector Consolidation Update March 2014

    Considerable progress has been made in the consolidation process during the

    month of March 2014. Several banks and finance and leasing companies

    (NBFIs) have shortlisted potential merger/acquisition counterparts and are

    carrying out internal evaluations on such companies. The Central Bank has also

    approved in principle, certain possible consolidation activities amongst a few

    banks and finance companies. At the same time, the National Development

    Bank PLC and DFCC Bank have entered into a Memorandum of Understanding

    in order to proceed with their merger process.

    Several audit firms who were appointed by the Central Bank to carry out due

    diligence and valuation of the companies are in the process of finalising their

    reports. The Central Bank has continuously liaised with the selected audit firms

    to deal with any issues arising in connection with the due diligence and

    valuation processes, in order to ensure timely completion of these assignments.

    Communications Department

    31 March 2014

  • 2

    In the meantime, several strategic investors have indicated their willingness to

    infuse fresh capital to some of the banks and NBFIs, and such investments are

    expected to strengthen the balance sheets of those entities while enabling them

    to expand their business operations. The Central Bank has also granted approval

    in principle, for such strategic investments.

    The Central Bank has continued to maintain a close dialogue with all

    stakeholders of the consolidation process, while senior Central Bank officials

    have also participated at various public fora on financial sector consolidation, in

    order to clarify various matters pertaining to the consolidation process.

    Over the past few days, in keeping with the Central Banks request, banks and

    NBFIs have commenced submitting their broad plans on consolidation and

    greater participation in the economic activities, thereby adhering to the already

    announced time line of 31 March 2014. These plans are to be reviewed by the

    Central Bank within the coming week, and suitable responses due to be sent

    thereafter.

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    Communications Department 30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.

    Tel : 2477424, 2477423, 2477311

    Fax: 2346257, 2477739

    E-mail: [email protected], [email protected]

    Web: www.cbsl.gov.lk

    Press Release Issued By

    Date

    Financial Sector Consolidation Update April 2014

    Satisfactory progress was made in the consolidation process during the month of

    April 2014. All banks and finance and leasing companies (NBFIs) submitted their

    broad plans on consolidation and greater participation in economic activities. The

    Central Bank reviewed the broad plans submitted by the banks and NBFIs and

    another round of one-on-one meetings are to be held with the respective banks and

    NBFIs to discuss these plans further. Banks and large NBFIs have shown interest in

    merging/acquiring many smaller NBFIs and have initiated Board level discussions

    with the shortlisted merger/acquisition counterparts. To facilitate these discussions,

    due diligence and valuation reports of the respective NBFIs available with the

    Central Bank have been released to the interested parties, upon completing the

    necessary legal documentation. Several strategic investors who have shown interest

    in infusing fresh capital to banks and NBFIs have also initiated their preliminary

    assessments of the respective banks and NBFIs.

    The DFCC Bank and the National Development Bank PLC continued the preliminary

    work relating to the merger. The Merchant Bank of Sri Lanka PLC, MBSL Savings

    Bank Limited and MCSL Financial Services Limited have also initiated

    Communications Department

    30 April 2014

  • 2

    action on the merger of the three entities with the view of forming a single licensed

    finance company. In addition, approval has been granted by the Central Bank for

    several NBFIs operating within financial groups to proceed in the process of being

    merged.

    In the meantime, the process of preparing the Information Memoranda (IM), Due

    Diligence Reports (DDs) and valuation of NBFIs is expected to be completed by the

    appointed audit firms during the first week of May. These reports based on financial

    data will form the basis for negotiations between the interested parties and target

    NBFIs. At the same time, the Inland Revenue (Amendment) Act No 8 of 2014 and

    Value Added Tax (Amendment) Act No 7 of 2014 have been enacted by the

    Parliament giving effect to the budget proposal on financial sector consolidation. The

    Central Bank is in the process of finalizing the Guidelines on taxation as required by

    these Acts. These Guidelines will provide clarity on the proposed tax incentives for

    the financial sector consolidation process and further motivate the stakeholders of the

    consolidation process. The Central Bank has also initiated action to review the

    existing regulatory framework of banks and NBFIs to ensure that it is strengthened to

    address the challenges that will arise along with the consolidation of the financial

    sector.

    The Central Bank continued to exchange views with all stakeholders of the

    consolidation process while providing clarifications to queries raised by different

    parties. The Governor and other senior officials of the Central Bank also participated

    in several forums on financial sector consolidation organized by external parties

    during the month.

  • 1

    Communications Department 30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.

    Tel : 2477424, 2477423, 2477311

    Fax: 2346257, 2477739

    E-mail: [email protected], [email protected]

    Web: www.cbsl.gov.lk

    Press Release Issued By

    Date

    Financial Sector Consolidation Update May 2014

    The consolidation process has further progressed satisfactorily during the month of

    May 2014.

    The mergers between DFCC Bank and National Development Bank PLC, and

    subsidiaries of Bank of Ceylon, viz., the Merchant Bank of Sri Lanka PLC,

    MBSL Savings Bank Limited and MCSL Financial Services Limited are

    progressing as expected to be completed within the planned timelines. Finance

    and leasing companies (NBFIs) falling under the same group have also

    initiated the consolidation process. Interest has also been shown to infuse fresh

    capital to certain NBFIs to enable such companies to meet the enhanced capital

    requirements.

    In this regard, Information Memoranda (IM), Due Diligence Reports (DDs)

    and Valuation of Business Reports of NBFIs have been finalised by the

    Central Bank appointed Panel of Auditors. However, in certain instances this

    process took more time than expected due to the extended work involved.

    Communications Department

    30 May 2014

  • 2

    Banks and NBFIs have initiated negotiations with the shortlisted

    merger/acquisition counterparts based on the IM, DDs and valuation of

    business reports that were made available.

    The Central Bank has requested the Panel of Auditors to facilitate this

    negotiation process in an independent manner to ensure that the negotiation

    process is meaningful and successfully concluded. The auditors have agreed to

    operate a data room to facilitate the process.

    All banks and NBFIs were requested to submit their finalized plans for

    consolidation by 30 June 2014 in order to ensure the consolidation process is

    completed within the planned timeline.

    The Central Bank initiated action to implement the second phase of

    restructuring of The Finance Company PLC with a view of further

    strengthening the company so that it would now be in a position to attract a

    suitable strategic investor in accordance with the consolidation process.

    The Central Bank will be finalizing the Guidelines on taxation in terms of the

    Inland Revenue (Amendment) Act No 8 of 2014 and Value Added Tax

    (Amendment) Act No 7 of 2014 to provide clarity on tax concessions. These

    Guidelines will be issued in due course.

    During the month, senior officials of the Central Bank continued to participate

    in various forums on financial sector consolidation. The Central Bank

    continued to exchange views with all stakeholders of the consolidation process

    and closely monitor the progress being made.

  • 1

    Communications Department 30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.

    Tel : 2477424, 2477423, 2477311

    Fax: 2346257, 2477739

    E-mail: [email protected], [email protected]

    Web: www.cbsl.gov.lk

    Press Release Issued By

    Date

    Financial Sector Consolidation Update June 2014

    The consolidation process had made progress as planned, and during June 2014,

    almost all banks and finance and leasing companies (NBFIs) had finalized their

    consolidation plans and submitted their proposed merger/acquisition plans to the

    Central Bank. These plans will now be reviewed by the Central Bank with a view to

    facilitating the respective companies to proceed further.

    Banks and NBFIs, while negotiating with the shortlisted merger/acquisition

    counterparts, also maintained a close dialogue with the special unit of the Central

    Bank. In addition, as requested by the Central Bank, the Panel of Audit Firms

    continued their transaction management activities to facilitate the negotiation

    process between financial institutions in an independent manner.

    Work relating to the mergers that have already commenced, i.e., DFCC Bank and

    the National Development Bank PLC, and Merchant Bank of Sri Lanka PLC,

    MBSL Savings Bank Ltd. and MCSL Financial Services Ltd. continued to

    progress with the assistance of external consultants, where necessary. In the

    Communications Department

    30 June 2014

  • 2

    meantime, formal approval of the Monetary Board was granted for Assetline

    Leasing Company Ltd. to acquire Lisvin Investments Ltd., and for TKS Finance

    Ltd to acquire Asian Finance Ltd. At the same time, several NBFIs falling within

    the same group also continued the consolidation process while initial approval

    was granted for the mergers of a few other NBFIs as well.

    The Monetary Board also approved of providing funding support to certain NBFIs

    through the Sri Lanka Deposit Insurance and Liquidity Support Scheme in order

    to further strengthen the financial condition of those entities. Such support is

    expected to enable these entities to attract suitable merger/acquisition counterparts

    or strategic investors.

    The Guidelines on taxation in terms of the Inland Revenue (Amendment) Act No

    8 of 2014 and Value Added Tax (Amendment) Act No 7 of 2014 on the tax

    incentives to promote the consolidation process were also finalized, and

    discussions with the Ministry of Finance and Planning are currently underway.

    These guidelines are expected to be released to banks and NBFIs shortly.

    During the month, the Central Bank continued to maintain a close dialogue with

    all stakeholders of the process, including having a discussion with the

    representatives of the Ceylon Bank Employees Union.