Financial system further strengthened by CB
Sri Lanka’s financial system is set to be further strengthened by providing necessary regulatory relaxations to licensed banks and non financial bank institutions considering the extraordinary circumstances triggered by COVID-19.
The Central Bank expects to review the Banking Act during this year, expecting to upgrade the legal and regulatory framework of licensed banks.
Large commercial banks will be encouraged to continue looking into avenues of expanding into regional markets.
The Central Bank will continue to facilitate a market-driven consolidation process, enabling small and medium sized banks to merge with other banks, preferably with larger banks having sound financial positions and viable business models.
This was disclosed by Central Bank Governor Prof. W.D. Lakshman when he unveiled the bank’s ‘Road Map 2021 Monetary and Financial Sector Policies for 2021 and Beyond’ in Colombo on Monday.
A regulatory framework for technology risk management and resilience of licensed banks will also be introduced.
This would encourage banks to upgrade and strengthen their information systems and technology platforms in line with the international standards and best practices, he said.
The Supervisory Technology (SupTech) and Regulatory Technology (RegTech) solutions will be implemented to streamline the data-intensive offsite supervision function by harnessing the capabilities of artificial intelligence (AI) and machine learning.
The Government will be facilitating the establishment of the proposed National Development Banking Corporation (NDBC) by merging the State Mortgage and Investment Bank (SMIB), the Housing Development Finance Corporation (HDFC), and Pradeshiya Sanwardhana Bank (PSB), enabling a new era of development banking in Sri Lanka.
The Central Bank continued to address the challenges faced in creating strong non-bank deposit-taking financial institutions. Guidelines were issued to LFCs (Licensed Finance Companies) on the Prompt Corrective Action (PCA) Framework, with a view to ensuring financial soundness of the institutions concerned.
This would protect the interest of depositors and maintain public confidence in the financial system, and these guidelines will be effective soon, Prof. Lakshman revealed.
Several regulatory and supervisory frameworks were initiated to strengthen the business models of certain LFCs and to prevent failures.
The need to strengthen the NBFI sector has been well recognised by the Government and the Central Bank as well as the general public. Therefore, the restructuring of this sector will be pursued as a national priority in earnest in the period ahead, he added.
He assured that the Central Bank will continue its accommodative monetary policy stance, ascertain a single digit interest rate and drive private sector credit to expand by 14 per cent despite an estimated 3.9 economic growth contraction last year.
The bank intends to establish a permanent single digit interest rate structure in the economy, he revealed pointing out that it will be maintaining market interest rates at single-digit levels going forward.
“The business community will benefit from low-cost borrowing facilities corresponding to a low interest rate regime.” “This is imperative to promote investment and entrepreneurship in the country, the needed foundation for sustained high economic growth,” he said.
The availability of low-cost funding on a sustainable basis would encourage businesses, including start-ups, to venture into new industries and sectors that have high growth potential.
The Central Bank is confident that inflation will remain within the targeted range of 4-6 per cent over the medium-term, he added.
Recent tax reform initiatives constitute a much needed transformation of the country’s tax system towards greater simplicity.
The already announced tax relief measures are expected to stimulate the economy while actively contributing to improve business confidence.
Any revenue shortfall due to the changes in taxes announced recently is expected to be largely offset by action taken to eliminate unproductive current expenditures and to prioritise capital expenditures, he emphasised.