Financial Times

Central Bank to check on Harry J’s DFCC stake
By Duruthu Edirimuni
The Central Bank is examining the legality of tycoon Harry Jayawardena's alleged control of DFCC, in what could be the first test of the new Banking Act, amid widespread debate about his moves to bring Commercial Bank also into his growing business empire and the pros and cons of consolidation in the banking sector.

“The Central Bank is looking at the shareholding of DFCC closely and if any discrepancies are found, we will call the responsible parties for explanation,” a Central Bank source told The Sunday Times FT. He said that if any shareholder exceeds the stipulated 10 percent holding of DFCC, they will have to explain their position to the regulator, as stipulated in the Act.

“Eventually the country’s legal system has to decide on the validity of the Banking Act, because shareholders such as Jayawardena will seek redress from it, if they are called for explanation,” he said, adding that if Jayawardena goes to court, it will be the first time that the Banking Act will be tested in the country.

Jayawardena could not be reached for comment. Distilleries Company of Sri Lanka, widely seen as Jayawardena’s holding company, last week declared a 50 percent first and final dividend. According to banking industry sources, Jayawardena is setting the stage for consolidating DFCC, Commercial Bank and Hatton National Bank, which is not deemed by some as healthy for the banking industry.

“When one shareholder has a lot of clout and authority to run his own agenda, it is dangerous for the industry as a whole,” a stock broker said. He said one person should not be in control, possibly moving around the laws of the country. Banking sources are anticipating Jayawardena will remove Commercial Bank Chairman, Mahendra Amarasuriya, with whom he has had a longstanding dispute. He tried to oust Amarasuriya at the last annual general meeting of the Commercial Bank, which was blocked by former non executive Chairman of DFCC, Nihal Jinasena, voting in favour of Amarasuriya.

Jayawardena demonstrated his power over DFCC early this month by wanting Jinasena to leave the chairmanship of the development bank and appointing his ally Rajan Britto as the new chairman. “Ousting Amarasuriya at the next AGM is taking another strong step towards consolidating the three banks,” a stock analyst said.

Some stock analysts said that if Jayawardena shows his hand by ousting Amarasuriya, he will be exposed to the regulators. “That will give the regulators the opportunity to question Jayawardena,” a stock analyst said.
A banking source said that there is a very slim chance of Jayawardena ousting Amarasuriya this year, but he will do so eventually and time his move carefully.
However, some industry sources who approve such a consolidation said that a strong bank is needed to confront the multinational financial institutions which are expanding in the country.

“We need to think regional and consolidating these three banks is a stepping stone to go global,” a banking source said. He said the local economy is small and there has to be consolidation of major financial institutions for banks to be efficient, while narrowing the interest margins.

He explained that due to the huge competition among banks the credit evaluation process becomes weak and as a result there has been a huge rise in the non performing loans (NPLs) during the past few years. “When there is a weak credit evaluation process the banks have to make bad debt provisions after six months, which affect their net interest margins,” he added.

He said the costs of operation of the banks are also bigger, when compared to the total portfolio size, which in turn affect the net interest margins. “This is the main reason that our banks cannot expand into the region,” he said.

He said the multinational banks are leagues ahead of the local banks and they will be very aggressive competitors in the near future. “There should be strong financial institutions to fight the multinationals in the future,” he added.

Another banking source said that the country needs a strong bank to compete with the multinationals, but DFCC is a public company and any decision has to be taken in consultation with all the shareholders and not one shareholder. “DFCC has many shareholders and they have to be consulted when making decisions.

Jayawardena, without having an exposed ‘major’ shareholding, should not use his free hand,” he said, adding that public companies should not be run as proprietorships.

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