Tighter rules for Finance companies opening new branches
Sri Lanka’s monetary authority, the Central Bank (CB) has tightened the rules on opening new branches of Finance Companies ((Non-Bank Financial Institutions -NBFI).
The CB has issued a directive under the Finance Business Act no 42 of 2011 that NBFIs should take prior approval from the Monetary Board to open new branch at any place in the island.
A set of guidelines has also been forwarded to NBFIs recently changing the previous practice of seeking approval from the Department of Supervision of Non-Bank Financial Institutions.
The aim of this move initiated under the directions of CB Governor Arjuna Mahendran is to prevent the mush-rooming of finance companies in some areas of the island, a senior Central Bank official who wished to remain anonymous told the Business Times.
It is also aimed at preventing undue competition among finance companies and ensuring the existing NBIFs branches continue business in a profitable manner, he pointed out.
Chairman of Finance Houses Association of Sri Lanka, Ravi Yatawara said that this directive will not hinder the expansion of finance companies as they can open branches in accordance with the financial services of the area in which they have decided to locate their branch.
However, they will not be allowed to open a branch in areas where there are other finance company branches, he said, adding that some finance companies who have already made some commitments to open new branches have opposed the CB’s move.
He noted that the CB should consider their applications case by case and take an appropriate decision without pushing them into difficulty.
He revealed that several CEOs made their representations to the Governor at a recent meeting relating to this matter and he expressed the belief that it would be settled in an amicable manner.
Mr. Yatawara noted that the Central Bank would give approval in principal to set up branches after considering their applications and issue licences later to companies that have already made commitments to open new branches.
Several CEOs who attended the meeting told the Business Times that the regulator’s proposed plan has prompted them to suspend their business plan this year and curtail expansion out station.
They accused the CB Governor of trying to prevent the expansion of NBFIs possessing strong financial back up and sound management without taking measures to tackle the low efficiency financial sector (including the state sector) which has caused high cost of intermediation to the public and businesses in Sri Lanka.
A CEO of a Colombo finance company questioned as to how the NBFI’s are going to maintain its daily cash flow without branch operations especially during the periods of natural disasters like floods.
He said that some finance companies that have already made applications to open branches in remote areas in the North and East are yet to receive approval from the CB due to the recent move of the regulator.