Central Bank vows to tighten screws on finance firms

5 January 2018 09:48 am - 0     - {{hitsCtrl.values.hits}}

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  • Assures proactive regulating; says not shy to liquidate troubled firms
  • To create traffic light system for early detection of finance firms under stress
  • Enforcement Division set up in mid-2017 to oversee finance firms upgraded to fully-fledged dept.
  • Says will actively encourage consolidation within NBFI sector

By Chandeepa Wettasinghe

The Central Bank will tighten the screws when regulating the Non-Banking Financial Institutions (NBFIs) going forward and remain committed to consolidation in the financial sector, Central Bank Governor Dr. Indrajit Coomaraswamy said.


“Now, we’re going to be much more proactive and we’re not going to be shy about liquidating institutions,” he said while spelling out the Central Bank Roadmap 2018, on Wednesday.


As reported in Mirror Business on Tuesday, the Central Bank has been restricted from fully regulating the sector due to political interferences, which ended just five months ago, after constant lobbying by the Central Bank.


Five of the 58 NBFIs in operation, which include Central Investment and Finance PLC, The Finance Company PLC, ETI Finance Ltd, City Finance Corporation Ltd and Standard Credit Finance Ltd, are at varying degrees of distress, according to Dr. Coomaraswamy.


These five institutions account for just 0.7 percent of the country’s banking and NBFI sector assets, while the NBFIs in total account for approximately 8 percent of the Rs.11.2 trillion banking and NBFI sector asset base.


Dr. Coomaraswamy said that despite the small size of the NBFI segment, it is an important part of the economy that has to be regulated instead of being totally snuffed out, since it has a wide outreach.


The NBFIs take risks the traditional banking sector is unwilling to take and grow faster than banks, indicated by the NBFI segment growing by 20 percent in the last five years, compared to the 15 percent growth in the banking segment.

However, Dr. Coomaraswamy said that some NBFIs have been mismanaged and have engaged in fraud, while some have engaged in unethical lending practices and despite several regulations being introduced to strengthen the NBFIs, some have shown signs of stress while the growth of others have been curtailed due to the lack of regulatory compliance.


“This reiterates the need for continued strengthening of the existing regulatory frameworks on NBFIs to ensure the soundness of the sector and contain its spillover effects on the whole system,” Dr. Coomaraswamy said.


He said that a number of financial models and ratios are being introduced with the help of the US Treasury to create a traffic light system for early identification of financial institutions under stress, which would be placed in the amber category for early regulatory action, while those moving into the red would be liquidated.
The governor said that moving early to regulate or liquidate NBFIs is advantageous for depositors in NBFIs, whose interests the Central Bank is duty bound to look after. 


The Enforcement Division set up under the Central Bank in mid-2017 has been upgraded to the RED (Resolutions and Enforcement Department) to deal with the firms moving into the red, while a legal team will be set up in collaboration with the Attorney General’s Department to take criminal and civil action against mismanagement and criminal conduct.


Meanwhile, in order to create a stronger financial system, the Central Bank has introduced a Rs.1 billion minimum core capital requirement, effective at the start of 2018, compared to Rs.400 million previously and the requirement will increase to Rs.2 billion by 2020.


Dr. Coomaraswamy said that this is to encourage consolidation in the sector.


“The sector has too many players for the volume of business that’s available,” he said.


The previous government, under the then Central Bank Governor Ajith Nivard Cabraal, had introduced a financial sector consolidation plan, which saw the Central Bank matchmaking financial institutions for consolidation. Several did merge, although the plan ended prematurely with the change of government.


“We are doing it in a different way but we also want consolidation,” Dr. Coomaraswamy said, also noting that 20 NBFIs would still ensure competition in the segment—20 being the number of NBFIs the abandoned plan too found to be optimal.


However, nine NBFIs have already made requests to the Central Bank to provide a moratorium on the implementation of the minimum capital requirements and a report along with these requests would be forwarded to the Monetary Board, it was revealed this week.


However, Dr. Coomaraswamy said that the effectiveness of the Central Bank policies would be diminished if exemptions are provided after introducing a policy.
“We will be rigorous in our regulation,” Dr. Coomaraswamy said.


The Road Map also outlined the possible plans to introduce a 12 percent capital adequacy ratio and to encourage NBFIs to obtain credit ratings and list themselves on the Colombo Stock Exchange to enhance financial stability and management practices.


NBFIs have a rocky past in Sri Lanka, with 13 companies failing between 1988 and 1990, of which only two were revived with new investments, while the rest faced liquidation.


Dr. Coomaraswamy said that allowing NBFIs to mushroom up to the current number of 50 is a legacy of the Central Bank, which he is not willing to talk about and that his plans are to look towards the future.

 

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