Finance Sector Consolidation: Who Is It For?

Consolidation has become the buzz word nowadays. The foundation for this was laid during the budget speech delivered by President Mahinda Rajapaksa in November last year. He urged the need for the consolidation of the two development banks. Then Treasury Secretary Dr. Punchi Banda Jayasundara in subsequent post budget meetings took this to a little further and humiliated the two development banks saying they were much no less than micro-finance companies and therefore should be merged.

The Central Bank Governor Ajith Nivard Cabraal took all the responsibility upon him and recently announced a master plan consolidate the banking and finance sectors of the country. Large banks and finance companies were asked to merge with small banks and acquire one to three small finance companies. The ultimate plan was to bring down the number of finance companies to twenty from fifty eight and to create five banks with assets of one trillion rupees each. Thus consolidation has become the buzz word in the corporate sector in the country.

However, no explanation has so far been given by the Central Bank why, during the last couple of years, they issued so many finance company licenses? Given the high penetration levels of local banks, the need for an expanded finance company sector did not arise.However, it appears that the Central Bank thought otherwise for reasons they are yet to explain.

At the same time, before consolidation became the buzz word, when the Central Bank was inquired about its capacity to constantly monitor the 58 odd finance companies in the backdrop of Central Bank, itself admitting that there were eight distressed finance companies, they took out full page advertisements in national newspapers to defend the status-quo. However, the Central Bank suddenly changed its tune now has become the champion of consolidation.alt

The banks and large finance companies have been given time to identify small finance companies of their choice until March. The Central Bank said if there was any small finance company which hadn’t been acquired by next year, they have the power to merge it with an entity that they find fit. It would be really interesting to find out who would acquire those small finance companies which are not solvent and has liabilities more than assets. Will they be dumped to state banks and state-controlled finance companies since nobody in the private sector with a clear thinking wouldn’t want them? Already it is in the grapevine that a troubled finance company is being planned to be merged with a state bank.

The Central Bank plans to conclude the consolidation process by next year. What’s the hurry? What is the general public getting out of it? Is it that the government wants larger banks and finance companies who can borrow large amounts from overseas markets on behalf of them? Almost all the big private banks except Commericial Bank went to international markets and executed proxy borrowings for the government in 2013. With consolidation of the finance sector, is the government trying to create bigger proxies to borrow money?

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