Central Bank mulls curbs on finance companies
The Central Bank (CB) is mulling measures to restrict finance companies from mobilising public deposits, senior officials said. While this will not be done in the short term, they said the regulator is keenly studying the Indian model where finance companies borrow from the banks – not the public – to carry out their operations. “We’ll let the local finance companies utilise their existing deposits and then we want to bring in fresh regulations pertaining to deposit mobilisation,” a senior CB official told the Business Times. According to him, the CB has identified that despite the monitoring and stringent rules that govern the finance companies sector, some firms don’t comply with and abide by them.
“This is the reason that there’re always boom and bust cycles in this sector as we witnessed in the recent past starting with Golden Key,” he added. He said that despite the CB conducting public awareness programmes through notices, posters and publications to inform the public of authorised financial institutions and to warn them of unauthorised persons / entities that engage in finance businesses, still a gullible set deposit their cash in these. “When this happens in cycles, the system stability is affected.” He added that the CB is aiming at establishing a clear and predictable framework of rules that helps finance firms to nurture the more stable forms of capital movement.
The regulator now governs 48 licensed finance companies and in January took over the crisis-hit primary dealer Entrust and two of its finance company subsidiaries – Standard Credit Finance Ltd and Multi Finance PLC. Several other finance companies including the Central Investments Central Investment and Finance Ltd (CIFL) are in trouble, depositors in the lurch and seeking government intervention. In India, finance firms (or non-bank finance companies) cannot accept demand deposits, they aren’t a part of the payment and settlement system. The official said that people are condemned to unregulated saving schemes and scams and the CB has tried hard in the past but issues of micro- and macro-prudential oversight have happened.
He added that more needs to be done to ensure accountability, independence, transparency and integrity of the financial sector. He reiterated that public confidence plays an important role in sustaining financial system stability. “The regulation and supervision of finance firms, the promotion and use of standards of sound business and financial practice, explicit deposit protection and an effective disclosure mechanism all help to reduce the adverse consequences of a financial crisis,” he said adding that restricting finance firms from mobilising public deposits will be another step in securing sector stability.