Financial Times

Are consumers paying for inefficiencies of banks?
By Dinesha Matthias
The banking sector is said to be the most profitable sector in the Colombo Stock Exchange. A recent report by HNB Stock Brokers highlighted the strong results reported by banks for the first nine months of 2002, with profits growing by an aggregate of over 50 percent year-on-year. According to estimates by HNB Stock Brokers, for the full year 2002 the aggregate is actually set to increase to 62 percent.

Commercial banks are enjoying the benefits of interest rate cuts by the Central Bank. Contrary to the government's intention of reducing lending rates, commercial banks have maintained or only marginally reduced lending rates but cut interest rates on deposits drastically. The widening interest rate spreads has enabled commercial banks to record high profits.

The Central Bank's aim was to strengthen the revival of the economy by reducing interest rates. Unfortunately banks became the beneficiaries of this move at the expense of consumers.

In the interest rate comparison shown in the table, the drop in the deposit rate is higher than the drop in the lending rate, thus enabling the commercial banks to enjoy high interest spreads. Commercial banks maintain that their high non-performing loans portfolios is one reason for these wide interest rate spreads. But are consumers to pay for the inefficiencies of the banks?

Interest spread of commercial banks - 2000
The VAT being imposed on banks on the basis of 10 percent on recorded profits before tax plus personal cost would act as a minimum surcharge imposed on the profits made by banks. Currently the Bankers' Association is negotiating with the government to include VAT as tax-deductible expense. According to the HNB report if this takes place the effective rate of this tax would be reduced to nearly seven percent from 10 percent. If other segments in the economy are taxed, then the question is why banks are let off the hook, especially when they are making such huge profits?

At the launch of the banking sector research report, NDB general manager Nihal Welikala said that synergies and mergers would play a key role in the future of the banking sector. In the years to come the number of banks would come down to four or five from 25 today, he said.

Ranjith Gunasekara, NDB's assistant general manager, Finance and Information Technology, when asked for his comments about the synergies of mergers, said, "As banks become big they can take big risks. Therefore mergers and the synergies they generate are important."

The current universal trend appears to be that banks are merging and consolidating with each other hoping to obtain economies of scale as well as scope to boost revenues by cross-selling their products.

One such proposed merger in Sri Lanka at present is the NDB and NDB Bank merger, which is awaiting Central Bank approval. If these financial institutions merge they could take advantage of many synergies. For example, with the proposed merger between NDB and NDB Bank, NDB could benefit from NDB Bank's commercial banking activities. This proposed merger would help NDB in its much needed funding for project lending. NDB Bank could benefit from the capital base, customer base and brand equity of NDB.

At present one of the major problems with banks is their high operating costs. Through mergers these banks could use each other's IT systems, branches, and specialised staff and consequently reduce operating costs and increase profitability.
"Banking sector restructuring is necessary. At present with strict capital adequacy requirements and liquidity, banks need to restructure themselves to survive," said Rasaih Villavarajah, retired senior banker, Bank of Ceylon.

But there are fears that the proposed mergers between banks and consequent reduction in the number of banks would put the consumer at a disadvantaged position as a result of reduced competition. Mergers could lead to collusive behaviour among the large banks.

In Sri Lanka some of the specialized bank were started with the aim of providing development finance to the small and medium sector. If these development finance institutions are allowed to expand to do commercial banking activity they would lose their focus on SMI lending.

"Development finance institutions (DFIs) should not be allowed to go in to commercial banking activities," a banking expert who declined to be identified told The Sunday Times FT. "If DFIs are allowed to go into commercial banking and they start lending long term with short-term deposits, there is a huge mismatch."

One of the far-reaching problems of having a few dominant banks is that they could control the way consumers bank through the banking infrastructure system and therefore impose high bank charges and fees. Further closures of branches in rural areas may occur. Another danger is that the few remaining big players could block attempts by new entrants to enter the market. "Banks may operate in a cartel if they are allowed to merge, and they will lose focus on rural lending," said one bank analyst.

Seminar on 'Accelerate your Wealth'
A seminar titled 'Accelerate your Wealth' aimed at helping people being financially independent by being able to recognise and build wealth will be held at the Colombo Hilton on March 17 and 18.

This interactive experience is being conducted by the internationally recognised training organisation Entertaining Inc, headquartered in Amsterdam. Internationally acclaimed instructor Emesto Verdugo of Mexico based in Holland will lead the workshop. Verdugo is well known for conducting changing workshops and training seminars internationally with a proven track record of inspiring people from over 80 nationalities in 38 different countries.

"Many people are busy with successful careers, but they do not know how to help themselves with the correct strategy to create wealth for retirement or to retire early, and don't have a workable financial plan." Verdugo says.

"This workshop will help you realise financial awareness and change your way of thinking, to plan ahead to achieve your goals", he said. The workshop focuses on shifting one's paradigms about money and how to take successful action to make changes in your life in order to become financially independent and wealthy.
The event is coordinated by Carsons Airline Services (Pvt) Ltd and will be held at the Colombo Hilton.

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