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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ »  ‘Banks are sound’ says CB

‘Banks are sound’ says CB

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1 ‘Banks are sound’ says CB Empty ‘Banks are sound’ says CB Thu Jun 21, 2012 2:22 pm

Malika1990

Malika1990
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
In response to Tuesday's statement by the international rating agency, Standard and Poor's (S&P), the Central Bank of Sri Lanka yesterday assured the public that the Sri Lankan banking system is sound and resilient and is not prone to high risk as indicated in the rating agency's statement.

The bank also said that the S&P statement is factually incorrect, illogically analysed and is highly contradictory.

“Quite contrary to the rationale for the statement, Sri Lankan banking system is sound and resilient with the performance of the banking industry improving over past few years,” a statement issued by the Central Bank said.

It also said that the key financial soundness indicators of the banking sector which account for 55% of financial system assets were maintained at healthy levels.

“The Key Financial Indicators display a conspicuous improvement in the gross non-performing advances ratio (NPA) from 5.2% in 2007 to 3.8% in 2011 with absolute volumes of NPA indicating only a relatively lower growth of 25% in comparison to the overall credit growth of 69%, during this period. This evidence is contrary to the comment on the existence of a ‘weak payment culture,' the Central Bank said.

According to the bank, the capital base of the banking sector has increased nearly two fold since 2007 with the introduction of the Basel capital standards and enhanced minimum capital requirement for banks.

“It is pertinent to note that the core capital ratio and total capital ratio of 5% and 10% respectively, imposed by the Central Bank are more stringent than the international standards.”

“Liquidity of the banking system has been well managed with the statutory liquid assets ratio being maintained well above the limit of 20%,” the statement noted.

The Central Bank in its statement also emphasized that despite the global financial distresses, the Sri Lankan banking industry stands resilient and the regulations in force are of international standards.

“Licensed banks are required to comply with the requirements of the Banking Act and Directions issued on fundamentals such as capital adequacy, liquidity, related party exposure, ownership of share capital, classification of loans and advances, income recognition and provisioning, risk management in foreign exchange business, integrated risk management, off-shore banking transactions and assessment of suitability of bank directors and the key management. The compliance of banks with these regulations is monitored strictly on an on-going basis and corrective action initiated,” the bank noted.

“Thus, the views of Standard and Poor's that ‘the risk management practices are evolving' and that ‘the banking regulations in Sri Lanka are somewhat weaker than international standards' and specifically ‘governance and transparency are weak by global standards' are baseless. Importantly, this statement of Standard and Poor's is self-contradictory with their contentment on key regulations for Sri Lankan banks,” the bank averred.

The bank also said that it has a continuous supervision process which is an uninterrupted monitoring of banks to assess the trends of banks on an individual and a system-wide basis.

“Further, the affairs of banks are assessed through on-site examinations which are conducted at least once in two years. However, the Central Bank conducts follow up examinations on a more frequent basis based on the risks and significance of the examination findings. Measures have already been initiated to increase the frequency of conducting on-site examinations in the future,” the statement said.

Hence, the Central Bank stressed that S&P's statement that the frequency of on-site supervision may not be sufficient to detect risk build ups in banks is not justifiable.

Commenting on the concerns S&P had mentioned about finance companies, the Central Bank said that all licensed finance companies (LFCs) and specialized leasing companies (SLCs) are also closely monitored and regulated and LFCs and SLCs are subject to on-site examinations at least once in every two years and weekly, monthly and quarterly reports are obtained through a web based data reporting system.

“Apart from the regular supervisory procedures, spot examinations are conducted when the Central Bank identifies an issue,” the bank said.

Though the Central Bank in its statement had responded to a number of concerns raised by S&P, it did not mention anything about the issue of ‘potential conflict of interest' raised by the rating agency about the stock market investments by the Employees' Provident Fund, which is supervised by the Monetary Board of the Central Bank.
http://www.dailymirror.lk/business/economy/19617-banks-are-sound-says-cb-.html

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