Sri Lanka banking regulation weakened by conflicts, politics: S & P

 ECONOMYNEXT – Sri Lanka’s banking regulation is weakened compared to international standards by political interference and conflicts of interest but is improving, Standard and Poor’s a rating agency said in a sector risk assessment.


S & P said the operations of the Central Bank of Sri Lanka was closely tied to the government through its supervisory structure.


"The appointment of the governor appears to be susceptible political influence," the report said. "A new governor tended to be appointed with every change in government."


Elsewhere the report noted that an ex-Central Bank Governor had been noticed by court over a securities fraud involving a bond auction.


Police said this week that an Interpol red notice had issued for ex-Central Bank Governor Arjuna Mahendran.






Sri Lanka’s President Maithripala Sirisena replaced Mahendra with Indrajit Coomaraswamy, a technocrat with policy experience who has since won confidence of the market, according to analysts.


However his tenor is also not secure. President Sirisena had called for the central bank governor to be appointed by a constitutional council, a body with political and civil society representative which already makes key appointments.


Sri Lanka is to shortly change the governing law of the central bank to give it more independence and target inflation effectively.


Meanwhile S & P said the central bank is also managing the Employees Provident Fund, which has also bought into banks.


Dealers at the EFP were also involved in the securities scam involving bonds and had earlier been under fire for stock scams.


"The EPF is a large investor in Sri Lankan banking stocks," S & P noted. "We believe the Sri Lanka central bank is exposed to potential conflicts of interest, although we have no information on any specific incidences."


The government was also using its equity stakes to influence board positions, the rating agency said.


There appeared to be gaps in regulation, but the central bank with small thrift institutions not coming under it. 


However the central bank was taking steps to strengthen the system, the rating agency said.


The absence of loan to value ratios in pawning (lending against gold) was being tackled, with risk weight applied when the loan value is in excess of 70 percent.


Higher minimum capital requirements under Basel III is being implemented.


The risk weight is 200 basis points higher in Sri Lanka under the Basel III. Minimum absolute capital will also be raised.


"In the medium to long run, Sri Lanka’s banking system would benefit from good capital buffers to absorb unexpected losses," S & P said.


"Nevertheless most banks will have to step up capital (including hybrid) issuances in 2018.


"Many large banks are currently below or near the new regulatory capital requirement, which will kick off in 2019." (COLOMBO, 24 April, 2018)

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