The Central Bank will be firm and come down hard on Non Bank Finance Institutions (NBFIs) that do not comply with the rules and regulations governing them, Central Bank Governor Dr. Indrajit Coomaraswamy said at the launch of the 2018 Road Map recently.
“I mean by being firm and would not tolerate these institutions (NBFis) that do not fall in line with the regulations. We will not use public money to bail out unlicensed companies,” the governor said.
There are six NBFIs are in distress, which he called a ‘legacy of distressed companies’.
“We need to educate the public about these companies. If we keep them alive it is more dangerous. We have a different philosophy to regulate them,” the governor said.
According to the Central Bank, there are 50 NBFIs and 26 currently operating in the country.
“The number of NBFIs is too much and we need to put a stop to further expansion,” Dr. Coomaraswamy said.
But, journalists queried as to whether it not the Central Bank that gave the green light for NBFIs to be set up and reach this number and how come it is making a hue and cry about the number now.
They also questioned the role and responsibility of the Central Bank towards depositors of the now defunct Golden Key Credit Card Company and Central Investments and Finance Company (CIFL).
The governor said the crisis at Golden Key occurred prior to the commencement of his tenure and that the Central Bank will strengthen its regulatory powers and act against those non complying.
As per the regulation that came into effect from January 1 the minimum capital requirement for NBFIs has been revised upward from Rs. 400 million to Rs. 1 billion, followed by Rs. 1.5 billion in 2019 and Rs. 2 billion by 2020 for NBFIs.
The Central Bank sees that strengthening of the capital position will improve the resilience of existing institutions while encouraging only the more financially efficient and effective companies to remain in the sector.
Improved capital positions are also vital for the smooth consolidation of the sector in the near term through market driven acquisitions or mergers.
“There are ongoing discussions on encouraging Licensed Finance Companies (LFCs) and Specialised Leasing Companies (SLCs) to obtain credit ratings and list themselves in the Colombo Stock Exchange which in turn will ensure financial stability and operational excellence while creating healthy competition,” the governor said.
The Central Bank is also considering imposing directions that LFCs and SLCs achieve a capital adequacy ratio of 12 percent with the aim of improving sensitivity to risk while focusing on credit risk based on borrowers risk profiles and operation and market risk in the trading book.
The regulator will also encourage acquisitions and mergers among LFCs and SLCs to ensure a stable and strong NBF sector in the country.
The Finance Business Act is also being revamped to strengthen the regulatory framework with due considerations to the evolving characteristics of the sector. It is being revised to incorporate provisions related to the resolution of LFCs and SLCs and unauthorised establishments.
There has been widespread concern about NBFIs indulging in unethical lending practices particularly in the North and the North Central Provinces and creating increased indebtedness among the public.
The regulator has also engaged in macro prudential surveillance to monitor developments in the broader economy.
The Central Bank set up an ‘Enforcement Division’ mid last year within the legal and compliance department of the Central Bank to carry out duties relating to enforcement and resolution issues pertaining to financial institutions, combating the pervasion of prohibited schemes and other unauthorised financial undertakings while curbing violations related to exchange management.
The division department has been converted into a full-fledged department from January 1.
Statistics reveal that while the banking sector has grow by around 15 percent during past five years the NBFIs have grown by around 20 percent which has made it important to carry out proactive supervision and regulatory guidance.