The Budget 2016 presented by Finance Minister Ravi Karunanayake in Parliament on November 20 had a range of proposals bound to have a negative impact on Sri Lanka’s banking industry. However, the government’s pertinent proposal to direct the 32 licensed banks to cease engaging in leasing business with effect from June 1, 2016 could even to lead to job losses in the sector, officials warn.

“Presently, banks have employed specialized senior personnel who have expertise in the leasing business and other clerical staff. However, with the government’s decision, this might now force banks to consider even retrenching some of them if they fail to absorb the staff to perform other functions,” Secretary General at Sri Lanka Banks’ Association, Upali de Silva told Weekend Nation in an interview.

Explaining the rationale behind the government’s decision, Finance Minister Karunanayake had said that the leasing business had become a distraction to core banking functions and proposed that licensed banks should instead concentrate on their core banking activities.
“We have already met the Treasury Secretary and the Central Bank Governor and conveyed to them our displeasure over this proposal and now await a positive response from the government. The fact of the matter is that the end consumer will be affected the most than the banks itself,” De Silva claimed.

He noted that as far as leasing business of banks is concerned, while the rates offered was more competitive compared to finance companies, almost 50% of them (leases) were also channeled to the Small and Medium Enterprises (SMEs). Moreover, he said that they were done through an islandwide total bank branch network of a massive 3,700 branches which covered the remotest of regions in Sri Lanka.

“Finance companies are merely present in commercial areas. So, the losers from the decision will be the customers. Banks also have the advantage of having the ability to finance bigger investments like for ships which the finance companies will not have sufficient capital to fund,” De Silva said.

Meanwhile, analysts said the government’s proposal would have a serious challenge to banks since leasing, and motor leasing in particular from a bank’s point of view, had been a preferred medium to drive loan book growth due to the attractive yields enjoyed by banks, they were asset backed and hence quite a safe lending instrument and they also had an active second hand market.  On the other hand, from a consumer’s point of view, analysts opined that the move will restrict access to low-leasing advance rates, as banks generally quote low rates due to their access to low cost funds.

“We believe almost all banks would see a serious volume impact from this policy decision, as the sector’s median exposure to leasing stood at 8% by end September 2015. The NTB, in particular would need a change in strategic direction, as the bank’s loan book concentration to leasing is as high as 24%,” a top securities research firm said in a Budget review recently.

On the other hand, the other main Budget proposal which has attracted criticism among banking sector stakeholders is the requirement for all banks to expand their branch network by 15 percent by opening branches in lagging regions. The government has also stipulated that each of these branches will have to employ at least six employees.

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