Lobbying by finance companies resulted in arbitrary proposal
CBSL rules bar banks having subsidiaries
Proposal contradicts govt’s SME development strategy
Implementation will further fragment the industry
A day after the budget 2016 proposed to bar Licensed Commercial Banks (LCB) from engaging in leasing business from June 01, 2016, the Finance Minister, Ravi Karunanayake said banks must spin off their leasing business units to operate as separate legal entities.
“They (banks) must establish separate, independent companies to carry out their leasing business and it must not be a part of the group,” said Karunanayake.
The proposal is aimed at strengthening and opening up the full business opportunity for the non-bank finance sector which, according to the Finance Minister who is at cross roads.
However, it is believed that the proposal is arbitrary as it was a result of continuous lobbying by the finance companies ahead of the budget.
The Finance Minister had not consulted the Central Bank before including the proposal in the budget; hence the implementation could run in to multitude of confusions, Mirror Business learns.
It is also uncertain as to how the banks could set up a subsidiary because the Central Bank rules prohibit the banks in doing so.
The proposal is likely to create a non-level playing field. The capacity of finance companies—both professional management and technical know how—to carry out the additional volume of leasing business which was once carried out by the banks could also become a problem.
The interim government which opened the flood gates for vehicle imports in January through the slashing of excise duties on vehicles and making available cheaper credit through the banking sector now feels leasing business is a distraction to the core functions of a bank and thus brought the curtain down on leasing business by all LCBs.
“Banks must do their core business. You don’t need to have the full menu that is there. You do your core-activity and allow another industry to do leasing. I know this is distasteful for the banks,” Karunanayake said addressing a packed house of business leaders at a post budget forum organized by KPMG Sri Lanka.
According to the Finance Minister, the banks which already have their own finance companies as subsidiaries can continue their leasing business via the subsidiary but for those who do not operate with such subsidiaries will have to spin off their leasing business.
Meanwhile, the senior banker and CEO of NDB Bank PLC, Rajendra Theagarajah challenged the policy focus of the unity government as the banks play an integral part in the Small And Medium Enterprise (SME) sector development through its leasing business, not limited to vehicle leasing.
The proposal also contradicts with the government’s objective to create a stronger financial sector as the creation of more finance companies will further fragment the industry as it will further overcrowd an already overcrowded market.
Full govt. guarantee on deposits in finance companies
All deposits in non-banking financial companies (NBFIs) registered with the Central Bank will enjoy a 100 percent Treasury guarantee from January 2016, according to the Budget 2016.
Such an act would make deposits in NBFIs similar to government securities, which are considered risk-free.
Banks, which were banned from leasing activities in the budget to allow them to focus on core activities, could end up losing a core activity such as deposits due to this move.
However, Finance Minister Ravi Karunanayake said that to prevent undue concentration of deposits in NBFIs, interest rates—which are usually higher than banks—will be capped.
Having Treasury-guaranteed deposits would also allow the NBFIs to invest in high-risk and high-return investments; reaping the full benefits of high returns while paying capped interest rates for liabilities, while not concerned with the risks due to the guarantee on such liabilities.Karunanayake said that such a measure is being introduced to ease the minds of depositors while the government sets up a Financial Institution Restructuring Agency similar to the US Resolution Trust Corporation, which will help failing NBFIs to recapitalize and restructure their troubled assets.
The Finance Minister said that the government has observed wide space between the deposit and lending rates of NBFIs, and that the government will introduce credit counselling to consumers.
“We will protect the public who have got into difficulties in the payment of high rates of interest and penalty charges levied by financial institutions on credit cards and other personal lifestyle loans,” he said.
He added that the Central Bank will be instructed to restrict NBFIs from extending unlimited amounts of expensive credit to unsuspecting borrowers.
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