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Wednesday May 12th, 2021

End of the road looms for Sri Lanka’s small finance companies

ECONOMYNEXT – Sri Lanka’s small finance companies which have failed to boost minimum capital this year may be ordered to stop raising new deposits by the regulator, which wants to end forbearance, officials said.

About nine out of 58 non-bank financial institutions – mainly finance companies – have fallen short of a required billion rupees of capital this year.

The central bank’s non-bank supervisor unit has prepared a report on the smaller lenders who have asked for more time, which will be submitted to the governing monetary board soon, and no ‘cease and desist orders’ have been issued yet officials said.

But Central Bank Governor Indrajit Coomaraswamy who inherited number of festering failed finance companies and a primary dealer due to delays action is not keen on more regulatory forbearance which has contributed to past failures.

Coomaraswamy told reporter that a ‘line has to be drawn’.

Deputy Governor CPJ Siriwardene said companies with a smaller capital and asset based could not weather shocks as bigger ones and in any case they raised deposits at higher rates than banks.

In 2018 non-bank lenders should meet a billion rupees minimum capital and 2.5 billion rupees by 2020, requiring consolidation if new capital is not injected.

Non-bank lenders however play an important role in expanding financial access giving credit to riskier customers who are left out by risk-averse banks and they also have tactics to recover assets.

Typically finance companies fall into trouble with their property portfolios, not leasing, when loose central bank policy fires bubbles which are then corrected by delayed rate hikes.

But in the case of some, including the primary dealer Entrust, outright fraud has been blamed.

The most spectacular non-bank failures happened in the 1980s during perhaps the worst monetary policy in the country’s history in the midst of record deficit, spending that fired 20 percent inflation, rapid currency depreciation and 30 to 35 percent interest rates.

Another series of failures occurred after loose policy from 2004 when it was corrected in 2008.

Coomaraswamy said more rule based framework is being developed to oversee the finance companies with early warning and faster resolution.

A new resolution department had already been set up, he said. Technical assistance had also been sought from the US, he said.

In the US, which has thousands of small banks due to legacy regulations that blocked branch banking bank failures are common.

The Federal Deposit Insurance Corporation (FDIC) is either the regulator or receiver of many of these and it typically moves in on Friday and the bank re-opens under a different name on Monday (typical FDIC press relese).

Each year about a dozen banks fail in the US. In the US there is no longer forbearance for small banks, which are mandatorily resolved when capital falls.

In 2017 only 8 banks failed banks were resolved by the FDIC, but in 2010 and 2011 after loose Fed policy was corrected, more than 50 banks failed in a year (list failed banks resolved by FDIC).

Early resolutions makes it easier to sell the assets and deposits with a smaller deposit insurance payout.

Coomaraswamy said there were enough powers to resolve non-bank lenders, but it is not clear whether firms can be liquidated and assets transferred as fast as the US.

However the central bank was updating all laws coming under its purview, including the finance business law, he said. (Colombo/Dec03/2018).


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