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Sri Lanka banks hit by tax hikes, leasing ban, possible deposit drain

ECONOMYNEXT – Sri Lanka’s commercial banks could be hit by a triple whammy of higher corporate and deemed value added taxes, loss of leasing business and a state guarantee on finance company deposits may also shift money out by the budget for 2016, a research report said.

"We take a negative view on the Commercial Banking industry with the changes introduced in the 2016 budget proposals," Asia Securities, a Colombo – based brokerage said in a research report to clients.

"As a single sector, we believe, the industry will have the highest impact from increasing taxes while proposed structural changes such as cessation of leasing business and government giving guarantees to finance companies will bear down further on the industry."

Corporate taxes will be raised to 30 percent from 28 percent and a ‘value added tax’ hike to 12.5 percent from 11.0 percent. A turnover tax called National Building Tax will also be raised to 4 percent from 2 percent.

The hit on profits on forecast profits this year would be between 8 to 14 percent in the larger banks, the report said. Seylan Bank will be hit by 13.6 percent and DFCC Bank may be hit by at least 8 percent.

A so-called Economic Service Charge of 0.5 percent however can be set off against the actual tax payments.

Under a budget proposal, banks will be banned from doing lease business from June 01.

Leasing is about 6-8 percent of their loan book. Nations Trust Bank with a 24.5 percent exposure would be most affected with 18 percent interest income at stake.

Commercial Bank will have the least impact with a 6.9 percent exposure and 4.5 percent impact on interest, Asia Securities said.

Finance Minister Ravi Karunanayake has indicated that banks would be allowed to do leasing under a separate arm.





"If implemented banks who already do have a separate finance subsidiary will have the option to transfer its staff and business activities easily," the report said.

"Other banks would be required to obtain a separate finance license, sell-off the business or the government might pressure them to acquire troubled smaller finance companies and will result in a complicated scenario with integration issues in the near term.

"Only Commercial Bank (Indra Finance), Union Bank (UB Finance) and Sampath Bank (Siyapatha Finance) owns separate licensed Finance Companies at present."

The government is also planning to give a guarantee to finance company deposits.

"At present, Finance Companies offer relatively higher interest rates for deposits, mostly fixed, on the back of a higher risk when compared to a commercial bank," Asia Securities said.

"On average over 50 percent of the Commercial Bank’s deposits are fixed and in case the fixed deposit holders shift towards Finance Companies, on the back of lower risk and better rates, this will lead to a serious liquidity crisis in the Commercial Banking system."

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