Statement by Deshamanya Professor W.D. Lakshman - Governor of the Central Bank of Sri Lanka

The Sri Lankan Financial System Remains Resilient and
All Possible Measures are Taken to Ensure the Safety of
Deposits of the General Public

There has been speculation by various groups and individuals that Sri
Lanka’s financial system and financial institutions are in a weak position and that
the general public is at risk of losing their deposits made at those institutions.
As the regulator of both banking and non-bank financial institutions that
accept public deposits in the country, the Central Bank of Sri Lanka wishes to
assure the general public that it will continue to take all possible measures to
ensure the safety of public deposits. Hence this statement to educate the general
public on the true state of affairs about financial institutions and their stability.
The COVID-19 pandemic and the resultant slowdown in the domestic as
well as the global economy have created a challenging environment for the
operations, not only of the financial sector but also for all types of economic
activities in the country. The performance of the real economy and the financial
sector are closely intertwined. The future performance of the financial sector
depends on the survival and growth of domestic businesses. The government and
the Central Bank have therefore requested the financial sector, particularly the
banking sector on the back of its inbuilt balance sheet strength, to continue to
support the economy in various ways, while the Central Bank is providing the
necessary liquidity and regulatory support to the financial sector to meet these
challenges. Even prior to the onset of the outbreak, going back to 2018 and 2019,
there was a rise in non-performing loans in both banks and non-bank financial
institutions, particularly due to the sluggish growth in private sector credit and
overall economic activity. By the time of the pandemic impact, the government
and the Central Bank had taken decisive measures to revive the economy including
the establishment of a more conducive tax regime and a more favourable monetary
policy stance, supporting growth of the real economy. We are confident that,
despite the temporary setback caused by the Covid-19 pandemic, the Sri Lankan
economy and the financial sector continue to remain dynamic and resilient.
Conditions would become stronger in the period ahead as the economy recovers.
The banking sector remains strong with total capital adequacy ratio above
16 per cent, net stable funding ratio above 130 per cent, liquidity coverage ratio
above 175 per cent and statutory liquid asset ratio above 32 per cent. The nonperforming loans ratio has shown some decline while the provision coverage ratio
also picked up during the first quarter of 2020. Benefitting from the new tax
regime, profits after tax of the banking sector for the first quarter of 2020 were
considerably higher than in the same quarter last year. With these performance
indicators, I do not think anyone needs an additional assurance on the current
strength of the banking system, which accounts for 62 per cent of Sri Lanka’s
financial sector.
Let us now turn to the non-bank financial institutions, particularly the
licensed financial companies sector. These institutions in the country’s financial
sector play an important role in serving diverse quality credit needs of relatively
low income segments of the economy. Certain measures introduced recently to
stabilise the macro-economy, particularly the curtailment of the importation of
motor vehicles, had a disproportionate adverse impact on finance companies. As
part of its financial sector stability objective, the Central Bank has availed required
liquidity support for licensed finance companies, while standing ready to provide
emergency support for the sector if needed.
It is with the cancellation of the licence of The Finance Company PLC by
the Central Bank recently that the speculation I highlighted at the outset has
gathered pace. However, I must emphasise that the cancellation of the licence of
The Finance Company PLC and regulatory action against a few other finance
companies in the recent past were done to protect the depositors and to ensure
financial system stability. The cancellation of the licence has enabled us to provide
full compensation through the Sri Lanka Deposit Insurance and Liquidity Support
Scheme for 93 per cent of depositors of The Finance Company PLC numbering
135,100. The remaining 10,072 depositors of the Company will also get
compensation up to Rs 600,000 per deposit holder at the outset. In similar
previous cancellations of licences of Central Investments and Finance PLC and
The Standard Credit Finance Ltd, 95 per cent of depositors in each of these
companies have been fully compensated by now. Compensation payments to
depositors of TKS Finance Ltd have been delayed and limited to 26 per cent, due
to judicial proceedings, but the Central Bank has recommenced the process of
compensation and expects to cover almost all depositors of this company. I am
certain that the general public would understand that the Central Bank action in
respect of The Finance Company PLC to protect the interests of depositors was
made necessary by various longstanding, legacy issues. Corrective regulatory action
taken in respect of a few institutions does not mean that the entire non-bank
financial institutions sector is in trouble. We indeed observe that some licensed
finance companies are on par with small or mid-sized banking institutions.
Therefore, I would like to urge the general public not to be distracted or misled by
baseless comments and malicious speculations expressing doubt about the health
of our non-bank financial institutions sector as a whole.
Having said that let me re-emphasise an important general caveat in banking
and finance business that the Central Bank has reiterated in the past. Although
various financial institutions are licensed, regulated and supervised by the Central
Bank, it does not mean that all their operations are managed by the Central Bank
on a day to day basis. Business models of these institutions are different from one
another, enabling them to offer different levels of interest compensation for
depositors benefitting from their investments in businesses generating higher
returns. The general public must therefore take note of the fact that higher interest
rates offered on deposits generally mean that the relevant institutions are engaged
in more risky ventures.
In respect of the non-bank financial sector, the Central Bank message is the
need for consolidation. The smaller should consider consolidating with the
stronger. We have highlighted, time and again, that Sri Lanka has too many
financial institutions given the size of its economy. At the same time, we urge
financial institutions to diversify their business models, particularly to support
domestic production activity, rather than being driven purely by short term gains
through financing imports and other business activities familiar to them. The
Central Bank will use its authority and powers in the future to get the non-bank
financial institutions as well as banking institutions behave as suggested above.
Let me conclude by reiterating that the Central Bank will use all available
tools at its disposal to maintain financial system stability. It remains committed to
keep the deposits of the general public safe from economic and financial fallout of
COVID-19 and similar future unforeseen events. It also must be noted that the
Central Bank will not hesitate to take legal action against individuals and groups
spreading false or misleading information with intentions of creating unjustified
disruptions in the bank and non-bank financial sectors
2020-06-07 08:05:04
ආර්ථික පුවත්