Sri Lanka's new banking act came into effect in June 2024.
In this Decision Points panel Bingumal Thewarathanthri, Chief Executive of Standard Chartered Sri Lanka discussed the new law’s impact and how the banking sector needs to adapt.
Bingumal Thewarathanthri is also Chairman of the Sri Lanka Banks’ Association.
We are working with the 1988 Banking Act. That was very impressive document at the time, 88 page document. Now close to 40 years we've been working with the same act. There had been some amendments in 2006, but post that the GFC, the global financial crisis happened, Basel 3, Basel 2, Basel 33.1, all these measures have come in and I think it's high time that we, I mean the act. That's the first thing I would like to say. So yes, cost is a big element here, but we have no choice now on the compliance side anyway, banks are taking massive. Appliance caused because of financial crime, cyber crime, etcetera. On top of that for the Sri Lankan banks, I think working on this new act and looking at the framework more importantly, the monitoring 1 is related party monitoring. The other one is the camp is the key management person and there are there are new criterias, you need better experience, better qualifications. Central bank will finally decide who should be appointed. So finding new people, paying them more, all these costs will come into play, right. But this is very common in mature markets. But the biggest thing that I see here is in terms of cost, the capital cost because this has a big element around the capital equity and governance. Those are three areas that they were trying to manage with the large exposure policy that is mentioned in the ACT. You know, ability to lend to large conglomerates or any client. You're single borrower limit is coming down from 30% of the total capital to 25% of the tier one capital. Wow, that can have your exposure in some cases 20 to 40% of SBL limit will come down by 20 to 40. There's a lot of the bets, right, OK. So that's a big change. We've never seen anything like that. The other thing is on the large exposures today, you're looking at 15% of your core capital aggregation of all the 15% clients can go up to 55% of the total borrowing. That's the second check, right? That is coming down to 10%. So with that, what will happen is banks will really struggle to run with the current capital structures. So a lot of the Tier 2 capital will be relevant at that point. You need to bring more Tier one capital. And capital has a cost. The capital cost has gone up significantly with US rates going up. Hopefully with the easing cycle, hopefully by next year, the capital cost will come down in the emerging markets and we have time for this. So that's the other good news about this. So we will start monitoring from 2026 January. So you have to be compliant by end of 2028. So we have time to bring the capital in. We have time to manage the Spa. So a lot of time given to manage this. But the capital cost is something that would say a big cost and the other. Important thing is you know to bring foreign capital in your roots has to be around 18 to 20%. Today the industry RE is about 1314%, right. But generally when foreign investors come to an emerging market, they look at very high ROTC. You will have to define rot return on tangible equity. So generally global banks deliver 1314% tangible equity. That's the level that the global banks are delivering. Sri Lankan banking sector should be a minimum 15% as an industry in my view and to attract capital. You have to have fired like 18% Rots. Now that will also have a cost attached to it because you have to be lean and mean and all of that. You know, you have to make sure that your cost to income ratios are down. So there's a separate cost attached to bring that cost down.
