The ‘no retrenchment’ policy slapped by Central Bank (CB) on all financial sector institutions in the consolidation programme, has now started to haunt almost all companies in the process of absorbing troubled finance entities.
According to Lanka Orix Leasing Company PLC (LOLC) Chief Financial Officer, Sanjeevani Kotakadeniya, this restriction has posed critical challenges for all those acquiring companies, and LOLC group is no exception.“We are not supposed to retrench any staff. This is one of the biggest challenges that these ‘A’ grade companies have in acquiring loss making or companies that have systematic risk on the financial services sector. I think this is a critical challenge facing companies,” she said speaking at the recently held CIMA post budget forum titled ‘Business impact of the 2015 national budget’.
CB’s financial sector consolidation master plan categorized all the non-bank financial sector institutions (NBFIs) into three categories: A, B and C based on assets, core-capital base and extent of compliance with the regulatory framework.There were 59 NBFIs, out of which 19 category A NBFIs were identified as having more than Rs.8 billion assets, over Rs.1 billion core capital base and were in compliance with the regulatory framework.Other 39 companies which do not meet the above criteria were grouped as B and another one under category C.
Then the category A companies were required to acquire troubled and financially weaker category B NBFIs and/or to merge with category B NBFIs to reach categoryA status to have 20 standalone NBFIs which have an over Rs.20 billion asset base each by 2016, of which at least three would specialize in the micro-finance business. However, CB as the first move, asked not to retrench a single staff member in the merger process, undermining the very rationale behind a merger between two entities to achieve synergies, economies of scale and cost efficiencies.
According to Kotakadeniya, the forced nature of consolidating with a troubled finance company itself causes a strain on the acquirer and as well the group, as these companies carry lot of inefficiencies.She noted the challenges they are going through currently when trying to merge its newly acquired BRAC Lanka Finance PLC (former Nanda Investments and Finance PLC) with the LOLC group, as the latter hardly makes any contribution yet having over 600 employees.
“Actually if I take the three finance companies which we have onboard (already), none of those companies have 600 employees but we generate business volumes and profits of over Rs.1 billion. This company with 600 employees makes hardly anything,” Kotakadeniya added. During the three months ended September 30,2014 (2Q15), BRAC Lanka made a net loss exceeding Rs.3.44 million while LOLC Group made a net profit of Rs.1.59 billion pushed by its three financial services companies. During the past decade, LOLC Group has grown mainly through acquisition and Kotakadeniya played a major role in those acquisitions, particularly after 2007.