CB, NBFIs agree to restrict deposit mobilisation on some conditions
The modalities of restricting finance companies (NBFIs) from mobilising public deposits are to be worked out in consultations, compromise and consensus with relevant financial institutions.
This agreement was reached following an assurance given by Central Bank (CB) Governor, Arjuna Mahendran to involve representatives of NBFIs in the process of devising new regulations and modalities pertaining deposit mobilization, at a meeting with CEOs of NBIFs in Colombo on Wednesday a few days after the revelation of this move by the Business Times.
Mr. Mahendran told CEOs that this process will take some time as he has no intention of arbitrary action without consulting the stakeholders, Chairman of the Finance Houses Association of Sri Lanka, Ravi Yatawara, one of the participants at the discussion, said.
He said that several CEOs informed the Governor that the CB proposal of following the Indian model of directing NBIFs to borrow funds from commercial banks was not workable in Sri Lanka.
Mr. Yatawara pointed out that NBIFs and banks are competitors in the financial sector and such arrangements are not pragmatic in the long run.
Some NBIFs used to borrow from local banks earlier and it was now completely halted.
He revealed that they have also pointed out to the CB Governor that even in the Indian model some well-established finance companies are allowed to mobilise public deposits.
He emphasised that the lending portfolio will shrink as restrictions on retail deposit mobilization will force finance companies to rely on wholesale sources of funding.
On the other hand, banks will also find it difficult to lend money to its competitors playing on the same field, he added.
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 emhasised.
Meanwhile Mr. Mahendran, when contacted, said: “Those present didn’t like this proposal, but we informed them of the pros in this move”.
He said the regulator is keenly studying the Indian model where finance companies borrow from the banks to carry out their operations. “We’ll let the local finance companies utilize their existing deposits and then we want to bring in fresh regulations pertaining to deposit mobilisation.”
Referring to the finance companies complaint that banks are already poaching their customers and this proposal will put them down, he said: “We gave them alternatives in terms of borrowing and mobilising deposits.” (Also reporting from Duruthu Edirimuni Chandrasekera)