Acquisitions in the finance sector
View(s):Last week’s budget proposal for smaller finance companies (if part of a group or bank) to be absorbed by their main company or bank is likely to trigger mergers and acquisitions in this sector next year.
The plan, initiated by the Central Bank (CB), is intended to consolidate operations of this sector but more importantly, reduce the risk that, of late, has become a serious issue in the finance company sector.
While a few companies like CIFL are ailing – notwithstanding the collapse of Golden Key and its subsidiaries or the case of Sakvithi whose owner is languishing in jail while the former chairman of Ceylinco-controlled Golden Key, Lalith Kotelawala is a ‘free man’ – latest reports indicate that quite a few finance companies are having problems.
The Business Times has regularly and diligently highlighted the issues faced by depositors, particularly pensioners and investors who have ploughed their life savings, in failed companies and the struggle to recover their money.
They have got a raw deal. Depositors have squarely blamed the CB for the lack of supervision of these doubtful organisations. The CB on the other hand has pointed out to the number of advertisements that repeat ad nauseum warning to the public not to invest in dubious and unregistered deposit-taking finance companies.
“We have repeatedly urged the public to invest in established and regulated companies. What do we do if they don’t listen to us?” Central Bank Governor Ajith Nivard Cabraal once said.
Fair enough but depositors argue that the CB hasn’t done enough to ensure that even registered finance companies are not taken to task when doubtful accounting issues arise.
Accusations apart, the proposal for a consolidation of the sector has come in for praise from even directors of finance company, as seen in a Business Times poll conducted this week. The poll showed that 90 per cent of the respondents believed the budget proposal on finance companies is a good one while 83 per cent believed it would reduce risks to depositors (in future).
It was one of the few occasions where a government proposal or plan won absolute support and confidence in a Business Times poll!
While the new proposal has been initiated by the CB, respondents to the poll believe that it was essentially the CB’s inability to properly regulate this sector that, in the first place, resulted in this kind of consolidation mechanism.
Respondents have also blamed auditors and directors of these troubled companies for the crisis.
Issues facing finance companies are also seeping into the banking sector where the business is not growing enough for many to share the pie. Smaller banks are finding it difficult to manage with uncompetitive interest rates, slow economic activity and mergers with other smaller or larger banks have been in the pipeline over the past few months. According to a report in last week’s Business Times, the CB is encouraging smaller banks to merge with larger ones to create a more robust financial system.
In both instances, the plan to consolidate the finance company sector to reduce risks to depositors and ensure deposits are protected, and reduce the number of banks is a good one, as long as it there is sincerity in its purpose. Often some proposals particularly the ones seen in the last few years involving vehicle taxes were believed to have benefited certain people.
The latest budget proposal itself is not compulsory but voluntary as explained by the CB. However the CB plans to, through its guidelines, ensure that finance companies will fall in line and be absorbed by the parent entity.
While the guidelines would only be released in January 2, 2014 when the CB releases its roadmap for the year, it is believed that these finance companies would function as a department in the main company.
There are nagging questions that come to one’s mind in a scenario like this. For example, will interest rates come down in keeping with normal bank rates (if it is a unit in a bank), or how would these units promote a typical-finance company investment option? These issues, no doubt, would be addressed in the January 2 guidelines by the CB.
As repeatedly pointed out earlier, the clamour to invest in finance companies at higher interest rates is predominantly to receive a bigger monthly income for depositors. Due to the high cost of living, new expenses (higher education for children, sometime overseas placements) and soaring medical bills for aged pensioners, people are forced to look for better investment options, even though there are risks involved, as the CB keeps pointing out.
Nevertheless plans to consolidate and strengthen the finance company sector is a good one and would hopefully inject new life into a struggling industry, lacking in confidence and credibility.