CB to phase out finance firm restrictions on public deposits mobilisation
Faced with concerns and opposition from finance companies, the Central Bank (CB) is now phasing out its plan to restrict finance companies from mobilising public deposits, instead of a ‘one-shot’ implementation. CB Governor Arjuna Mahendran told the Business Times that the CEOs of finance firms had explained their difficulties to him at the discussion some three weeks ago and he had given them some alternatives. ”They said that if the finance firms are curbed from accepting deposits, then the companies may have to lay-off a great number of staff, which poses serious issues. On the other hand this measure was due to the cyclic nature of failed finance companies.”
He said that despite the CB conducing public awareness programmes through notice, posters and publications to inform the public of authorised financial institutions and to warn them of unauthorised persons/entities that engage in finance businesses, a gullible set of investors still deposit their cash in these. “When this happens in cycles, the system stability is affected.” Mr. Mahendran said that taking into account the issues that finance firms may face, if they are stopped on mobilising deposits, the CB has decided to phase this process. “Our proposal is to cap the deposits that are mobilised by these firms,” he said.
Another proposal is to introduce a ratio to deposits against the borrowings at finance companies and then freeze that quantum of deposits. “These are proposals which we thought out loud,” he said adding that further discussions would be had in this regard. A senior CB official told the Business Times that most countries in the region have had issues with the cyclic nature of finance companies. “Malaysia is a good example. In the last decade Malaysia had merged all its finance companies with banks,” he said adding that now Malaysia doesn’t have any finance companies.
He also said that possible gains from a finance company consolidation programme are two-fold; financial performance and efficiency improvements. “This is in line with the objective of attaining economies of scale and efficiency gains.” He said that of the eight ‘strong’ finance companies in Sri Lanka most show more borrowing than deposits in their balance sheet, which is a cause for concern. The CB governs 48 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.