Hidden motives behind forced consolidation?asks Eran

Eran Wickramaratne

Opposition Member of Parliament, Eran Wickramaratne last week accused the Central Bank (CB) of forcing the banking and financial institutions in the country to go for mergers and absorptions through the process that the regulator had spelt out. Whilst pointing out that although the consolidation of the financial sector in principle is a good move and a long felt need, he however condemned that the guidelines that has been issued in facilitating the process were very illogical and that which raised suspicions whether the regulator had ‘ulterior motives’ in forcing the consolidation.

“When consolidating, the decision to merge and who to merge with should be left to the parties by shareholders, its directors and senior managers. They will make the decision based on a certain business and commercial rationality and not driven by any political objective. But from the Master Plan that had been published by the Central Bank it mentions, for example, that the expected outcome of the Central Bank is to have a ‘large development bank’ which means though not mentioned explicitly, was obvious that the Central Bank is forcing NDB and DFCC Bank to merge,” Wickramaratne, who was the former CEO of NDB Bank said.

He noted that if the need to have large banks is to have a larger capital base that allows borrowing from overseas, then it is a wrong rationale as it should be synergy of the two institutions that should be at the heart of a merger.

“If this is not the rationale then the merger is happening due to the needs of other parties. Large mergers can be detrimental to competition as after the merger, competition would not be existent which may be detrimental to SMEs and customers and creating a monopoly of some kind,” Wickramaratne pointed out.

He further cautioned that by creating such a large bank, eventually the government will get control as they already own large amounts of shares in these banks in various ways and added that this will, in turn, politicize the institutions and rest the control in the Central Bank.

The consolidation approach by the Central Bank had recently put forward has directed 19 Category A Non Bank Financial Institutions (NBFIs) to discuss with 38 Category B NBFIs and identify merger partners and agree terms and conditions for Mergers/Absorption. The plan also says that all 38 Category B NBFIs has to merge either with local banks or merge amongst themselves so that they fulfill conditions of category A NBFIs. The CB has also given a time period of until March 31, 2014 for local banks and category A NBFIs to identify partners of their choice from within the category B NBFI for such mergers/absorptions.

“The timeframe that has been given by the Central Bank to identify partners is clearly not sufficient as there are large implications from the plan to the staff and other parties,” Wickremaratne said.
He further elaborated that despite the CB harping that the industry will not face any job cuts through the exercise, this was impractical as many financial institutions will be forced to shed employees if they were to run a commercially viable operation.

Meanwhile, the MP said that the institutions that are in trouble should be separated and not be forced to load its bad loans on well run institutions.

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