The Central Bank in its infinite wisdom, and as outlined in the CB road Map 2014 has proposed that the above two technically development banks should merge, so that they can be a strong entity, that will be able to borrow at Competitive Rates and lend on to finance infrastructure and other long term development projects both in the private and in the public sector.
This decision was predicated by the inability of either bank to borrow in the amounts stipulated by the CB from the international markets at competitive rates. For example the GOSL was able to get loans at 6% and the DFCC only at 9% due to its lower credit rating and insignificant size as far as the International community is concerned.
The reason the GOSL wanted the Banks to borrow from foreign sources, was so that they could hide Govt. borrowings through the local banking sector and treat it as local borrowings and lessen the impact of the GOSL foreign currency borrowing exposure. This is very silly as this ruse can easily be detected and allowance made in preparing debt ratings and Sovereign Debt rates.
In essence just so that the GOSL can borrow, it has decided that these two entities in which the State has considerable direct and indirect (through EPF and such like) holdings, must merge.
It is bad policy, as this will create one large development bank instead of two that can compete. There is a lot of upside in development financing and if managed correctly these two banks can double in size in a short period if left to run independently, with a little help in increasing their capital base.
The question in the end becomes one of, can people borrow at reasonably low rates to stimulate investment in new and expansion of existing productive industries and small businesses? This can be done only when spreads can be trimmed from the historic highs they currently carry, due to many inefficiencies, but primarily due to Govt. and political interference in the management of the State Banks that both insisted on hiring staff of political sycophants, and lending money to dead beat political operatives. This problem is NOT going to go away with the merger, and so the expected benefits will NOT materialize except for the instant increase in the Balance Sheet Equity of the combined Institution.
In any case NDB has seen fit to engage in Commercial Banking, outside of its initial ambit as they found it more profitable. For example the new product they are advertising called the Salary Advance from NDB is a popular concept where they will lend on the account holders monthly income, and of course charge a hugely usurious rate of interest for that privilege, but mislead the potential customer who signs on as to how much it really costs him. A play on the lack of financial savvy of the average person!
The merger is NOT going to direct larger amounts of cheaper loans to SME sector, a traditional engine of a growing economy. In fact, quite the contrary, due to the lack of competition, they may be able to penalize the borrower and get away with it as he cannot shop around for a better deal. GOSL will just suck everything!
This shortsighted approach to further their own ends, means the GOSL is engaged in a series of moves that whilst on the surface might seem sensible, when investigated in depth, is far from the truth.
The Banking Sector is traditional and docile in Sri Lanka, fighting like the politicians to steal from the same pot, without trying to increase the size of the pot. If half as much energy is expended on increasing the size of the pot, I am sure there will be better results all round, which in the end is a higher rate of growth from the steps taken.
The NUB of the problem; the Govt. desire for borrowings to fund unproductive investments of dubious returns. That results in a colossal waste of funds. This instead should be directed towards productive investments in the private sector. Every rupee borrowed by the Govt. means one less available to the private sector.
Don’t destroy two competing banks that are a little undercapitalized for selfish motives. Look at the bigger picture. The US$10B remitted this year will be for the most part be deposited by the hard working financially illiterate people at about 5%, and borrowed by the Govt. at 5.5% from say the NSB. If the Development Banks were able to borrow this at 6% and lend at 8% what would it do to the growth rate of Sri Lanka? A huge fillip so we can race to $5,000 GNP per capita.
STOP THE MERGER IN THE PUBLIC INTEREST PLEASE