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Sri Lanka to make banks buy finance company units, give tax credits

ECONOMYNEXT – Sri Lanka will make finance companies owned by banks merge and where larger finance companies own smaller ones they will also be made to combined, Prime Minister and Finance Minister Mahinda Rajapaksa said in a budget for 2021.

Out of 58 finance companies, only 20 had had assets over 20 billion rupees, he said.

“In order to strengthen these finance companies, I propose to merge the subsidiary finance companies that have not been cancelled by the Central Bank of Sri Lanka with the parent company,” Finance Minister Rajapaksa said.

“Further, it is proposed to merge the finance companies functioning under commercial banks with the banks in order to strengthen the banking sector.

“With the aim of incentivizing the strengthening of banks and finance companies, I propose to consider the investment expenditure in acquisitions as deductible expenditures.

“I further propose to amend the necessary laws to enable commercial banks to also act as investment banks with the view to enhancing the diversification of the finance sector.”

Finance companies lend to riskier clients mostly rejected by banks, and are quick to foreclose under leasing laws, giving financial access to a large section of small and medium industries who would otherwise have been left out in the capital.

However several finance companies got into trouble because there was no mandatory resolution framework with a capital threshold. Regulatory forbearance up to 2015 led to erosion of capital and negative net assets of several companies.

Ex-central bank Governor Indrajit Coomaraswamy brought in a more robust resolution framework.

A mandatory resolution framework which requires liquidation or merge when capital falls 1 or 2 percent below requirement allows for quick mergers and rescues and reduces any payouts from deposit insurance.





Lack of second tier finance companies, in addition to locking small and medium enterprises out of financing could also encourage unregulated ‘shadow banking’ operations to proliferate when interest rates fall, analysts say. (Colombo/Nov22/2020)

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