ECONOMYNEXT - Resolution of Sri Lanka's troubled finance comanies had been held back by politics but the regulator has now been given the go ahead to act independently, Central Bank Governor Indrajit Coomaraswamy said.
"There has been regulatory forbearance in the past due to politics," he Coomaraswamy told reporters, responding to questions why no action had been taken in the past.
This week the central bank barred ETI Finance and Swarnamahal Financial Services from taking deposits or given loans for six months, pending the injection of new capital.
The central bank had discovered "mismanagement" in ETI Finance and Swarnamahal Financial Services, which had violated directions from the central bank in the past, Coomaraswamy said.
However the owners had put up assets under the firm, which could now be sold to get liquidity.
Problems in the two finance companies existed from before he took over 18 months ago, he said.
The first direction to the ETI had been issued in 2012, he said.
Over the last several months, the current administration had indicated that there was no political impediments to fixing the finance companies.
Soon after the administration came to power a mechanism including an asset management company under the finance ministry was promised in budgets, but nothing happened.
Fitch Ratings downgraded the ETI to 'CCC' just above default in 2011 and the firm went rating shopping, but the public continued to invest in it.
The latest action on ETI was triggered after the firm ran into a liquidity crisis with depositors pulling out money.
The central bank is now dealing with at least five troubled firms, which includes ETI, Swarnamahal, CIFL, Citi Finance and Standard Finance as well as Entrust a primary dealer, dating back from earlier credit bubbles.
Coomaraswamy said court action had been filed against officials of two firms. Entrust spent millions of rupees backing rugby clubs tournaments of ex-President Rajapaksa's sons. Other primary dealers expressed surprise when fraudes running into blllions of rupees were revealed.
Primary dealers have sophisticated IT systems which can be monitored by a regulator. "We get letters asking for explantations when there is a small delay in allocating a security to client," one primary dealer said at the time. "It is unbelievable how all this happened."
Central Bank is now developing a resolution mechanism to avoid regulatory forbearance and take quick action.
Officials said there were over 50 finance companies. During the last administration about a dozen new licenses were given suddenly but later an effort was made to forcibly consolidate firms.
Though the well capitalized firms were quickly bought by banks, others found no buyers and the current administration stopped the forced consolidation.
The Central Bank had now raised the capital of banks and has set up special unit to resolve trouble finance companies quickly, Deputy Governor C J P Siriwardene said. (Colombo/Jan02/2018)