CENTRAL BANK OF SRI LANKA

Master Plan on Consolidation

of the Financial Sector
Presented by
Ajith Nivard Cabraal
Governor, Central Bank of Sri Lanka
17 January 2014

Over the past 8 years, substantial progress has

been achieved in all macro-fundamentals
Indicator
Real GDP Growth
(Avg. for 5 years ending)
GDP

Unit
%

2005

5.0

4.0

2013 (Est/Proj)
6.7

Remarks
Substantially higher growth
trajectory

16,596

24,406

67,374

Unemployment

7.6

7.2

4.5(1H)

Inflation (Annual Average)

6.2

11.0

6.9

Almost 5 years at single digit levels

Satisfactory progress being made

Current Account Deficit

Tourist Arrivals

US$ mn

2000

% of GDP

6.4

2.7

3.9

000

400

549

1,274

1,968

6,650

176% increase in 8 years!

Steady progress

Remarkable increase after the

conflict
Steady y-o-y growth, & 237%
increase in 8 years

Remittances

US$ mn

1,160

FDI Inflows

US$ mn

175

272

1,459

Steady growth

US$ mn
Months of Imports

911
1.5

2,735
3.7

7,216
4.5

Consistent improvement and

steady progress

Gross Official Reserves

Exchange Rate (End Period)

Rs./US$

80.06

102.12

130.75

Budget Deficit

% of GDP

9.5

7.0

5.8

Public Debt

% of GDP

96.9

90.6

78.0

Broad Money Growth (M2b)

12.9

19.1

16.0

Private Sector Credit Growth

11.8

21.5

8.0

Stock Market Capitalisation

Rs. bn

88.8

584.0

2,459.9

Stable levels maintained

Important progress towards fiscal
consolidation
Moving steadily towards greater
sustainability
Close to projected levels
Adequate and sustainable
Reflects peace dividend and
corporate sector vibrancy

The Country's
Per Capita Income
has risen sharply,
and is projected
to increase well
beyond US$ 4000
by 2016

A sound medium term macroeconomic framework

is projected over the next several years
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

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

US$ mn

990

1,500

1,750

3,700

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

Broad Money Growth (M

16.0

14.0

14.0

14.0

Private Sector Credit Growth (in M2b)

8.0

16.0

17.0

17.0

External Sector

Overall Balance
Fiscal Sector

Monetary Sector
2b)

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

Going forward, the Central Bank is also preparing

plans to ensure that the country will avoid the
possible Middle Income Trap

* Estimate for 2013

By 2016, Sri Lanka will graduate to the Upper Middle Income category as per
international classification

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

To deliver the envisaged results, the twin

objectives of the Central Bank have to be
secured

The Central Bank is charged with the duty of securing:

a) Economic and Price Stability; and
b) Financial System Stability
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

Maintaining single digit inflation for nearly 5 years

has given the Central Bank confidence that price
stability will be secured in the future

2014 Between 4% and 6%

2015 & 2016 Between 3% & 5%

bb

Going forward, Sri Lanka will also require a

strengthened financial sector, which can steer the
country towards continued financial system
stability

Accordingly, over the next few years, the financial

sector will be actively encouraged and supported to
move towards a new vision

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

10

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.

In 1997, Malaysia realized the importance of

consolidation and initiated a Merger Programme to
consolidate the financial industry

11

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.

12

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.
The move strengthened the economic viability of all banks,
and provided Singapore with better services and a
competitive edge in the region.

13

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.

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

14

Banks and NBFIs account for 64% of the

entire Financial System assets:
Banks - 57% ; NBFIs - 7%
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

15

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

172.3

3,891.0

66.3

Rs 250 Bn to Rs 500 Bn

21.5

369.8

6.3

Rs 100 Bn to Rs 250 Bn

45.0

540.7

9.2

Rs 50 Bn to Rs 100 Bn

31.0

307.6

5.2

Less than Rs 50 Bn

33.6

183.3

3.1

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 Total Assets Market share

Banks
(Rs. Bn)
%

16

Capital
(Rs Bn)

Rs 50 Bn to Rs 100 Bn

79.7

1.4

4.3

Less than Rs 50 Bn

68.1

1.2

12.9

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

although many have been in operation in Sri Lanka for
many decades!
Assets Size

Number of Total Assets Market share

Banks
(Rs. Bn)
%

Capital
(Rs Bn)

Rs 250 Bn to Rs 500 Bn

297.2

5.1

26.8

Rs 100 Bn to Rs 250 Bn

107.3

1.8

16.0

Below Rs 50 Bn

10

173.8

3.0

40.8

The current NBFI sector, which is about 7% of the

financial sector, is also dominated by just a few
NBFIs
Assets

Number of Total Assets

NBFIs
(Rs. Bn)

Market Share
%

17

Capital
(Rs. Bn)

Over Rs 20 Bn

10

433.0

61.5

64.1

Rs. 8 Bn to 20 Bn

97.4

13.8

8.5

Less than Rs 8 Bn

40

169.3

24.1

3.5

Under Litigation

3.8

0.5

0.1

18

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

To ensure Financial System Stability, the

expected outcome in consolidation is expected
to result in a banking sector where

19

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.

and an NBFI sector where

20

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
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.

10

The State Banks will be expected to contribute

significantly towards building a strong and dynamic
banking sector

21

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!

22

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

11

The present 58 NBFIs will be identified as Category

A, B and C in preparation for the consolidation

23

NBFIs with :

Category A

Assets more than Rs. 8 bn

Core Capital more than Rs. 1 bn
High degree of compliance with
Directions issued by CBSL

Category B

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 C

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

19

13

38

35

24

The Consolidation Approach would be

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..

12

All Banks and NBFIs will be expected to adhere to a

rather focussed time-line...
Consolidation/Merger Strategy
Merger of NBFIs within a
Group

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

Increase of minimum core

capital of NBFIs to Rs. 1 bn
Increase of minimum core
capital of NBFIs to Rs. 1.5 bn

Submission of the
Plan of Action to
Central Bank

Target Date for

Completion

31 March 2014

30 June 2014

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

31 December 2014

1 January 2016

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

26

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

13

27

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.

In the merger/absorption process, the Accounting,

Valuation, Tax, Human Resources and other due
diligence practices will be supported

28

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.

14

29

The tax concessions and benefits proposed in the

Budget 2014 are expected to facilitate the
consolidation process
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

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.

30

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

15

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

31

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.

The Central Bank will closely guide the

merger/absorption process to ensure that it will be
smooth and constructive

32

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.

16

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

The Risk Management Framework of banks will

also be improved further
Key Policy Measure

Issue guidelines on the Stress Testing Framework

Implement the new Liquidity Risk Management
Framework by the introduction of the Basel III
Liquidity Coverage Ratio (LCR)

Introduce a Regulatory Framework for Valuation of

immovable Property of Licensed Banks

34

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

17

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

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

36

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

18

At the same time, the Central Bank will

significantly enhance the level of regulatory action
in the NBFI sector, as well

37

Introduce a system of lower leverage ratios to NBFIs which are only partiallycompliant 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

In this newly emerging scenario, certain marketing

practices currently pursued by Banks & NBFIs will
be discontinued

38

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

19

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

20

Communications Department
30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.
Tel : 2477424, 2477423, 2477311
Fax: 2346257, 2477739
E-mail: dcommunications@cbsl.lk, communications@cbsl.lk
Web: www.cbsl.gov.lk

Press Release
Issued By
Date

Communications Department
13 January 2014

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
30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.
Tel : 2477424, 2477423, 2477311
Fax: 2346257, 2477739
E-mail: dcommunications@cbsl.lk, communications@cbsl.lk
Web: www.cbsl.gov.lk

Press Release
Issued By
Date

Communications Department
31 January 2014

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

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.

Communications Department
30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.
Tel : 2477424, 2477423, 2477311
Fax: 2346257, 2477739
E-mail: dcommunications@cbsl.lk, communications@cbsl.lk
Web: www.cbsl.gov.lk

Press Release
Issued By
Date

Communications Department
28 February 2014

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.

 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.

Communications Department
30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.
Tel : 2477424, 2477423, 2477311
Fax: 2346257, 2477739
E-mail: dcommunications@cbsl.lk, communications@cbsl.lk
Web: www.cbsl.gov.lk

Press Release
Issued By
Date

Communications Department
31 March 2014

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.

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.

Communications Department
30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.
Tel : 2477424, 2477423, 2477311
Fax: 2346257, 2477739
E-mail: dcommunications@cbsl.lk, communications@cbsl.lk
Web: www.cbsl.gov.lk

Press Release
Issued By
Date

Communications Department
30 April 2014

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
1

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.

Communications Department
30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.
Tel : 2477424, 2477423, 2477311
Fax: 2346257, 2477739
E-mail: dcommunications@cbsl.lk, communications@cbsl.lk
Web: www.cbsl.gov.lk

Press Release
Issued By
Date

Communications Department
30 May 2014

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.

 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.

Communications Department
30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.
Tel : 2477424, 2477423, 2477311
Fax: 2346257, 2477739
E-mail: dcommunications@cbsl.lk, communications@cbsl.lk
Web: www.cbsl.gov.lk

Press Release
Issued By
Date

Communications Department
30 June 2014

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
1

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.