Merger rules raise fresh fears among finance firms
View(s):The recent directive by the Central Bank for smaller finance companies to merge with one another or larger ones and licensed banks to acquire finance companies has created an air of uncertainty and fears in the industry with divided opinion amongst key players, industry sources said.
While acknowledging that at least 10 companies are struggling to meet strict CB guidelines on minimum capital requirements, members of the Finance House Association of Sri Lanka, an industry body representing registered finance companies, are divided over the proposal. The association is yet to issue a statement on the issue.
The risks facing institutions planning a merger is very real, and if mishandled can completely undermine the ultimate value of the deal, a CEO of a leading finance company who wished to remain anonymous due to fear of victimization, told the Business Times.
Worried customers may switch their deposits to finance companies managed by bigwigs with powerful political backing and key employees may jump ship.
On the other hand some employees will lose their jobs after the merger as the two financial institutions will not be able to maintain overheads with same job descriptions.
“There will always be some discrepancies when it comes to salaries and benefits between the two companies. Other than the financial aspect, the main concern that every individual has is how it will affect them”, he said.
There are around 50,000 employees serving in 58 non-bank financial institutions, In addition there are over 10,000 suppliers.
The regulatory authority should consider this factor seriously before pruning the number of institutions to 20 as announced in the Central Bank 2014 road map.
The only way to effectively mitigate many of these issues is through effective, proactive and frequent communications with all key stake holders, he added.
At present many people go to finance companies to get loans as it is hassle free although their interest rate is high and they have over 50 such institutions to negotiate their loan, a businessman revealed.
He noted that with reduction of NBFIs a monopoly will be created and such institutions will tend to restrict their disbursement of loans like banks which have strict procedures and collateral systems.
“People will have to lend money from rural and urban money lenders (Poli Mudalali) in future under the current set up,” he predicted.
The goal of any business is to maximize shareholder wealth and buying a company that helps accomplish that goal is seen as a good thing. However merging with a loss making, sick or just surviving smaller company doesn’t make any sense, he said, adding that a majority of strong NBFI’s held this view.
When asked to comment on failures after merging with smaller companies in other countries, Central Bank Governor Ajith Nivard Cabraal noted that they have learn lessons from such failures and it will not be repeated in Sri Lanka.
The new rules will facilitate the merged entity to broad-base it’s presence into a widespread locations and to attract more business opportunities, which will eventually, not only enhance the income levels of the company but also facilitate the need for the hour to cater to a larger and diversified segment of the society in the development process, he pointed out.
The NBFI’s which are currently having negative net worth are expected to be absorbed by December 2014 and other mergers to be completed by 2015.
The aim is to increase the minimum core capital of these entities to Rs. 1 billion by 1st January 2016 and to further increase it to Rs. 1.5 billion by 1st January 2018.
A former Association President said that smaller negative net worth finance companies with less than 400 million core capital should be resurrected for the benefit of depositors.
The Central Bank has taken this initiative towards this end and everyone in the industry should strive to make these finance companies more viable.
Duplication of functions within each firm should be eliminated to the benefit of the combined firm.
Functions such as accounting, purchasing, and marketing efforts immediately come to mind. This is particularly true if two relatively small firms merge.
The retrenchment of employees should be carried out under voluntary retirement schemes, but there won’t be large scale job cuts after the merging of two same entities, he asserted.