The Non-Banking Financial Institutions (NBFI) sector has evolved over the past years to become a strong force in the finance industry in Sri Lanka.
Unfortunately, the public only remembers NBFIs in the light of unethical practices of non-regulated finance companies. But NBFIs account for many heart-touching, unsung narratives while working with less privileged people and this sector has empowered many with financial assistance and has assisted in eradicating poverty.
The NBFI sector has laid the foundation for many people to become entrepreneurs. There are two segments within NBFIs - regulated and non-regulated, and recent years saw several issues and disputes related to non-regulated finance companies which is one of the main reasons for reforms to consolidate the sector.
Consumer Credit Act
An amendment is needed in the Consumer Credit Act which allows non-regulated finance companies and regulated finance companies to carry out hire purchase services. This situation has led to several issues over the past years, so enacting the proposed Money Lending and Microfinance Act and making it unlawful for any person or institution to engage in lending activities without being registered, is the ultimate solution for these long-standing issues.
Viability of regulations
As NBFIs specifically cater to the people at the bottom of the pyramid, SMEs and micro businesses, there is huge risk involved. The accounting rules, legal framework and Central Bank regulations need to tally and be interconnected with each other without relying primarily on strict regulations. This means the regulations need to be impartial to customers and finance companies and focus on mitigating the risk to both parties.
Favourable environment
The NBFI sector, large, medium and small, contribute to the economy. The present scenario offers an edge to large finance companies over medium and small companies which need to be addressed. Therefore, a favourable environment needs to be created where all finance companies irrespective of size and location are able to thrive. These reforms will also contribute to the economic revival of the country in the long run.
Grievance handling
Every finance company has a grievance handling process where customers can resolve issues by discussing with the officer mandated with the process. This is a formal process and finance companies are bound to investigate the issues put forward by customers. Customers can even complain to the CBSL if the finance company does not properly carry out investigations. This process will help many and avoid disappointment for customers if it is well maintained.
Financial Ombudsman
Another suggestion is to regionalise the Financial Ombudsman service to handle customer complaints and disputes. This service is currently available in Colombo. Therefore appointing Financial Ombudsmen to all other regions is of utmost importance. The Financial Ombudsman is a person of high repute with experience in banking and financial services. He is selected and appointed by a panel of representatives of the Central Bank, the Securities Exchange Commission, the Institute of Chartered Accountants, the Bar Association, the Organisation of Professional Associations and a representative of the participating financial institutions.
Regulated environment
In case of an issue faced by a customer who obtains a service from a non-regulated finance company, the customer has no power over the finance company, so the importance of a regulated environment again comes to the fore and it is important that people embrace the services of RFCs. If the environment is regulated the CBSL can intervene and make sure that the customer’s issues are resolved. The reforms will further strengthen the NBFI sector and allow customers to obtain financial services, in the comfort of a regulated and safer environment.
The writer is the Senior DGM, Operations at People’s Leasing & Finance PLC and has 28 years of experience in the finance industry.