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Rs. 3.3 trillion in credit needed for income to double


Central Bank to focus on institutional, regulatory and legal strengthening of finance sector

Total lending of Sri Lanka’s financial sector would have to more than double by 2014 if the target of reaching a per capita income of US$ 4,000 was to become a reality and the Central Bank would introduce new policies to help banks and finance companies meet this demand.

"Sri Lanka has entered a new era of rapid socio-economic growth and financial institutions would have to be strengthened so that they could meet the credit demands of the economy and the main thrust of our policies would be aimed at this," Central Bank Governor Ajith Nivard Cabraal said. Sri Lanka’s per capita income, the amount each individual would receive if the country’s yearly income is divided equally, was US$ 1,020 in 2003. Total lending of the domestic financial sector was Rs. 700 billion.

In 2008 the per capita income was US$ 2,014 and total lending amounted to Rs. 1.6 trillion.

"Our aim is to increase the per capita income to US$ 3,000 by 2011 and US$ 4,000 by 2014 and this would mean that total lending of financial sector would have to be increase to almost Rs. 3.3 trillion," Cabraal said presenting the road map for the Central Bank’s monetary and fiscal policies for 2010 and beyond.

"We will begin to role-out several new policy measures aimed at strengthening the institutional and market infrastructure of the financial system so that they can meet this kind of demand for credit while streamlining procedural requirements to remove any impediments. The Central Bank would also strengthen the legal and regulatory framework," Cabraal said.

"Increasing per capita income is not enough, distribution of wealth has to be fair and this is why several measures would be taken to uplift rural economies and integrate the North and East with the rest of the economy," he said.

Cabraal said an existing credit guarantee scheme which had provided loans amounting to Rs. 1.3 billion to the agricultural sector would be broad based to include the SME sector.

Cabraal said the government should not engage in reckless spending and printing money to bridge budget deficits as it would put pressure on capital available to the private sector. For the same reason, he also urged public corporations to seek funds from external markets.

Heavy borrowing from the domestic banking sector by the government and public institutions have a tendency to drive up interest rates. In its 2008 Annual Report, the Central Bank urged the government to ease its domestic borrowings at rates below market rates as it starved credit to the private sector.

These are some of the measures the Central Bank proposes to introduce from this year onwards.

= An Export-Import bank is to be established with an initial investment of Rs. 200 million. Cabraal said the bank would be set up in collaboration of the state and the banking sector.

= The Central Bank intends to deepen the country’s corporate debt market by encouraging and broadening the issuer and investor base. A reliable and efficient benchmark yield curve, which would help the pricing of corporate bonds and debentures, would be developed. Risk management instruments are to be introduced while the regulation of superannuation funds (pension schemes) is to be strengthened.

= The Banking Act would be aligned with requirements of the new Companies Act. The Finance Companies Act would be amended to give the Central Bank more regulatory powers.

= A new law to regulate and supervise microfinance institutions is to be introduced. Cabraal said this would strengthen the role of microfinance in the economy.

= Pillar 2 under Basel II would also be implemented which outlines the responsibilities of board of directors of banks and the Central Bank in establishing and monitoring capital levels which ought to be aligned with a bank’s rick portfolio. Bank are expected to maintain capital on expected loss on credit, market and operational activities, credit concentration risks and interest rate risks and other unexpected losses.

= A rating system would be introduced to help the Central Bank look closely at banks at the bottom of the ratings.

= A deposit insurance scheme would be established. Initially the scheme would cover deposits up to Rs. 100,000 per depositor in licensed commercial banks and financial institutions.

= An umbrella credit guarantee scheme consolidating existing schemes amounting to Rs. 1.3 billion for the SME sector would be revamped. Cabraal said the aim would be to provide the SME sector access to credit at better rates.

= The Central Bank is working at improving payment and settlement systems and Cabraal said efforts would be made to facilitate deeper linkages with global financial markets.

~ The island ~ By Devan Daniel


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