rules for better banks
The Central Bank's decision to make a hefty increase in minimum
capital requirements of all licensed banks looks set to set off
a series of changes in the industry that should transform the entire
banking landscape in the country. For some time now it has been
felt that the island has far too many banks, that urban areas especially,
are over-banked and that rural areas are neglected by private commercial
neither depositors nor the majority of borrowers are happy with
the way they are treated by banks. Depositors complain that the
interest paid by banks on their funds is far too low.
businessmen complain that the interest they have to pay for loans
is far too high (except those big enough or with the right connections
to get special rates), especially when compared with the rates paid
by their overseas competitors. The government's stubborn maintenance
of low policy interest rates despite skyrocketing inflation has
meant that depositors are, in effect, getting negative returns -
the value of their deposits is being eroded - and those borrowers
lucky enough to be favoured customers of commercial banks are having
have also been accused of keeping too high spreads to cover up for
their inefficiencies and making excessive profits, although the
changed interest rate scenario has meant that the easy profits made
by banks trading in government securities is no longer available,
as reflected in the bottom line of some banks.
fiasco over the collapse of Pramuka Bank has also left depositors
feeling bitter. The effectiveness of the Central Bank's regulatory
role and supervision was called into question. There are also dark
rumours about the financial health of certain banks.
is in this context that the Central Bank has introduced the new
minimum capital requirements. The regulator has stated that one
of the objectives is to promote a "robust and stable financial
system" and that it is important to have strong banks that
are resilient to internal and external shocks.
is particularly relevant in the light of what happened at Pramuka
and it is pertinent to note that the biggest increase in minimum
capital requirements is for licensed specialized banks - a whopping
650 percent, from Rs.200 million to Rs.1500 million.
Central Bank has also said that the enhanced minimum capital level
for all licensed banks will "encourage the much-needed consolidation
of existing banks". This should lead to many mergers among
banks - a development the regulator has been known to favour for
the new rules have been welcomed by the bigger banks who are better
placed to comply with them while the smaller ones are feeling threatened
and fear they would be swallowed by the big banks or would have
to close. It could trigger a wave of mergers among banks and a drive
to raise fresh capital. This is certainly welcome in the face of
the present fragmented nature of the industry. Bigger and stronger
banks are needed because of increasing exposure to international
market forces. Banks, by nature, are highly leveraged institutions
with very little shareholder funds required in comparison with depositors'
funds. While consolidation may have its benefits there is a need
to ensure an adequate and healthy level of competition.
the presence of so many banks in the country there is still a feeling
that the competition has not brought about the desired benefits
to customers - that banks did not bring down their lending rates
to the extent desire by government and industrial borrowers. Ultimately,
it is the bank customers - the depositors and borrowers - who must