The budget 2016 proposed to introduce a ceiling for the interest rates offered for deposits by non-bank finance companies (NBFIs), in a bid to prevent undue concentration of deposits in the sector.
Further, the Central Bank will also issue directions restricting the ability of NBFIs granting unlimited amounts of credit (loans) at exponentially higher interest rates to unsuspecting borrowers.
“A wide differential between the deposit and lending rates is seen in the low efficiency financial sector which has caused high cost of intermediation to the public and businesses in Sri Lanka,” the budget said. The Finance Minister also gave the assurance that the government would protect public who have got into difficulties in the payment of the high rates of interest and penalty charges levied by financial institutions on credit cards and other personal lifestyle loans.
The enticing discounts offered on credit cards pull the public into debt trap and the industry data show that many credit card customers consist of revolvers who are unable to settle their outstanding balances.
Meanwhile, in a move to revive the distressed NBFIs, the government intends to establish a Financial Institution Restructuring Agency (FIRA) on the lines of the Resolution Trust Corporation in the United States of America. “The government will provide initial capital of Rs.10 million as equity and also issue a Treasury bond to the value of Rs.25 billion with a tenure of 5 years for the FIRA.
However, as a prelude to the above proposal in order to provide the depositors with a sense of comfort and security, the Central Bank of Sri Lanka will give a 100 percent guarantee on all deposits of all the registered finance companies by end January 2016,” Karunanayake said.
Meanwhile, the 15 percent interest rate offered on deposits only up to Rs.1 million of senior citizen of age 60 will be expanded to people above 55 years of age, while the maximum deposit value too increasing up to Rs.1.5 million.
However, the budget said the facility would be granted through the licensed finance companies (LFCs) where an interest subsidy of 1.5 percent will be granted by the government.
This could also create a non-level playing field if it is only made available through the NBFIs but not through the banks, hence the clarity is expected during the coming weeks.
“I propose to allocate Rs.1,500 million for this purpose. I note that Central Bank guarantee of deposits should increase the confidence of depositors,”