Reforms to strengthen finance sector next year
A major shake-up in the finance company sector is in the offing with guidelines being prepared by the Central Bank (CB) to reduce the number of firms. Separately, smaller, shaky, companies are to be encouraged to merge or be acquired by their bigger counterparts, officials said.
The planned reforms, aimed at strengthening and consolidating the finance sector, will be announced in January 2, 2014.
“There are 20 big finance companies (in terms of asset size) holding 90 per cent of this business. We are preparing guidelines for small firms to merge with each other or for them to be absorbed into a big company, which in turn will ensure their capital base is sound,” a CB official told the Business Times.
President Mahinda Rajapaksa, presenting the 2014 budget last week, said finance companies, which are subsidiary of another holding companies or a bank should be absorbed to the main unit, in an initiative aimed at reducing the risk to depositors and ensuring a stronger sector.
While the proposal was unclear whether it was voluntary or compulsory, the CB official confirmed that absorption, mergers or acquisitions is a voluntary exercise. “We don’t want any forced marriages,” he said.
In a statement a day after the November 22 budget presentation, the CB said it would issue guidelines in relation to the merger and consolidation of finance companies, at the time of the release of the CB Road Map 2014 and Beyond, on 2nd January 2014.
The budget proposals, industry analysts said, has stumped the industry with most saying that the short term impacts will be hard.
UB Finance will be absorbed by Union Bank (UB), its holding company while Sampath Bank will bring its subsidiary Siyapatha Finance under its direct control, , the official said.
According to him, merging People’s Leasing with its parent, People’s Bank (PB) isn’t a necessity as it is a ‘big’ entity and is ‘bigger’ than some banks as well. Also as People’s Leasing is a publicly quoted company, merging it with PB will indirectly make PB a listed entity, which is against the government policy of privatising public entities, he explained.
In most cases, the finance company subsidiary will operate as units or departments under the holding company, giving up its own name and identity.
“The smaller entity of the two will lose its identify completely and this will be a major impact on the banks in terms of absorbing the staff in their subsidiary finance companies,” an industry analyst opined.
He added that in this respect more and more voluntary retirement schemes will be introduced. “This will be done in order to retrench excess staff.”
There are about 30 finance companies which are subsidiaries of banks or a part of a holding company.
The CB official said that out of the 48 finance companies, quite a few have accounting issues. “This proposal was introduced to strengthen their balance sheets.” He added that the banks and financial institutions become stronger in terms of capital while operating cost is also greatly reduced after such mergers.
A finance company CEO said that as there’re too many finance companies their credit quality, standards, staff capabilities, etc have all degenerated as a result of everyone going after the same pie. “The CB is to blame as they granted licenses to all and sundry and it’s barely three years since (the issuance of licenses) and now there’s a change,” he said, adding the CB shouldn’t have issued all these licenses.
When the mergers happen the banks will ideally have a fully integrated view of how management and financial reporting worked together, all the way down to a single set of procedures, he explained, adding that a finance company on the other hand will be mre decentralized.
“Bringing them together would be a considerable challenge, because of the broad scope of the challenges facing the two organizations,” he said.
He added that a centralized, automated and outsourced functions and a single underlying platform solution along with policy, process and governance requirements should be clearly spelled out, bringing consistency to the new entity.