July 14, 2013 (LBO) - Sri Lanka is looking to be flexible on banks share ownership limits to make it easier to merge and allow sector consolidation, a top regulatory official said.
In Sri Lanka a single shareholder can own only 10 percent of a bank, except without special approval.
"I know the concern is about the share ownership limits," Yvette Fernando, head of bank ownership at the Central Bank said.
"We have taken note of the concern raised and we are working on whatever possible mechanisms."
Fernando was speaking at an LBR - LBO CFO Forum on the future of banking.
Bankers feel that consolidation will help cut overall costs which are now duplicated and also create bigger banks that can make it easier for domestic banks to venture outside.
Others feel that competition is healthy and reduced competition may not be healthy for further financial deepening.
Regulators say smaller banks have been nudged to become bigger or merge.
"We understand the need for consolidation," Fernando said. "In fact our attempt to have staggered based increase in the minimum capital requirement was to kind of at least to see that the few small banks get consolidated or merged.
"But it didn’t really happen."
"Every bank even at the very last level in time tried to somehow find their own capital and to be alone. So that didn’t work.
"But now we are looking at this share ownership limits also weather we can further facilitate."
The country’s banking sector has an asset base of 5,101 billion at the end of last year, accounting for 56 percent of the total assets of the financial system.
There are 24 licensed commercial banks which are permitted to provide current account facilities and 9 licensed specialized banks.
Rajendra Theagarajah, a senior banker believes there are too many banks with over 40 non bank financial institutions an over 30 banks.
"My personal take is it’s too much," he said. "Every one other than handful of global wholesale players is trying to get into the high street.
"Everyone is trying to build bricks and mortar branches," Theagarajah said.
"It replicates the cost structures. Are they able to absorb a type of scale one needs to have to really pay?
"As a result a typical cost to income ratio stills a way above your Asian comparables. Eventually the consumer will suffer because reducing margins will become a problem."
However analysts say financial institutions play in different risk categories. Non bank financial institutions generally play in the more risky categories not accessed by the licensed commercial banks.
But analysts say smaller licensed commercial banks may also be pushed into more riskier clients though their ability to absorb such risks may not be the same.
However in countries like the US partly due to historical factors on branch banking laws, there are many banks.
In the US there are more than 6,500 commercial banks and it had not prevented big banks being created.