Step 2: Setting up the “Financial Sector Consolidation Unit” at the Central Bank The “Financial Sector Consolidation Unit” of the Central Bank, in general referred to as the “Consolidation Unit” was formed to design a strategy to catalyze the consolidation process and to spearhead the structural changes necessary for strengthening the financial sector. The Consolidation Unit is headed by the Assistant Governor of the Central Bank in charge of financial system stability with high-ranking officers of Bank and Non-Bank Supervision Departments appointed as members. A Technical Assistance Team representing expertise in the areas of accounting, auditing, banking, legal and regulation was also appointed to assist the Unit. The Consolidation Unit is responsible for drawing up the Road Map to facilitate the envisaged outcome, providing guidance to the banking and NBFI sectors to ensure that its implementation will be smooth, effective and generate synergies to the financial system. The Unit is expected to liaise with all other stakeholders, such as Ministry of Finance, Inland Revenue Department, Securities and Exchange Commission, Colombo Stock Exchange, Registrar of Companies and Panel of Auditors, to facilitate the expeditious implementation of the consolidation process. Further, the Unit is also required to submit papers to the Monetary Board to obtain necessary approvals for the consolidation model of each Bank and NBFI on a case by case basis and to apprise the Monetary Board on the progress of the consolidation programme on a periodic basis.
Banks in Sri Lanka have been in operation for over 160 years while the NBFI sector has been a part of the economy for the last 80 years. Before the economic liberalisation in 1977, NBFIs carried out hire purchase and leasing business using their own funds or personally borrowed funds. Since the owners of such companies prudently managed their businesses and were cautious in lending, NBFI failures during pre-1977 era were extremely limited. The new economic policies in the post-liberalisation period gave rise to higher demand for credit from the private sector, which led the NBFIs to raise public deposits. However, lack of controls and regulations during that period limited the ability of the Authorities to move directly into the affairs of NBFIs. With the commencement of operations of the Central Bank of Sri Lanka in 1950, the Bank Supervision Department was set up, and has since been entrusted with the responsibility of supervision and examination of banking institutions. The scope of functions of the Bank Supervision Department was extended with the enactment of the Control of Finance Companies Act, No.27 of 1979, to include the supervision of NBFIs. The Bank Supervision Department was entrusted with the responsibility of providing the public with the required confidence in the financial system and protecting the interests of depositors. In order to achieve this objective, the Department was charged with the duty of continuous supervision and periodic examination of all banks and NBFIs in Sri Lanka.