Central Bank lifts regulatory leniency on small finance companies
The Central Bank (CB)’s action to stop its regulatory leniency from this year on troubled, small licensed finance companies without minimum capital has jolted those small lenders who are struggling to survive amidst stiff competition.
This move is aimed at protecting the public trust in the financial system with the introduction of a new mechanism to oversee the finance companies through early warnings and faster resolution, CB Governor Dr. Indrajit Coomaraswamy said in Colombo this week.
The ‘Enforcement Division’ of the Central Bank has been converted into a full-fledged department with effect from January 1 to carry out duties relating to enforcement and resolution issues pertaining to financial institutions.
The objective is to combat the pervasion of prohibited schemes and other unauthorised financial undertakings, while also curbing violations related to exchange management.
Assistance of the CID officers will also be sought to carry out investigations against errant finance companies, he disclosed.
The Board of Directors and the senior management of these institutions are also equally responsible for the operations of the institutions, he said adding that the CB will consider implementing the legal provisions against the errant senior management, if warranted, in the interest of depositors.
The minimum core capital requirement has been revised upwards from Rs. 400 million to Rs. 1 billion by January 2018, followed by Rs 1.5 billion in 2019 and Rs. 2 billion by 2020.
The CB may order to halt the taking of new deposits by small finance companies which fail to fulfill the Rs.1 billion capital requirement this year.
The strengthening of the capital position will improve the resilience of existing institutions while encouraging only the more financially efficient and effective companies to remain in the sector, he said.
However several heads of finance companies told the Business Times that the tightening of rules on capital adequacy and strict surveillance and stringent enforcement methods would have a big impact on their financial management and could even trigger the closure of some of the smaller companies.
This type of policing is not necessary to monitor finance companies; they said adding that it is not easy to raise the core capital up to Rs.1 billion this year under the present stagnate economic climate.
Presenting the annual Road Map for 2018, Dr. Coomaraswamy told a large gathering of top government officials, heads of financial institutions and CB officers that the rapid growth and broad outreach of the non bank finance sector necessitate proactive supervision and regulatory guidance.
While several regulations have been introduced to strengthen these institutions, some licensed finance companies have shown signs of stress, while the rapid expansion of certain others has been curtailed due to their lack of compliance with regulatory requirements.
This reiterates the need for continued strengthening of the existing regulatory framework of NBFIs to ensure the soundness of the sector and contain its spillover effects on the whole system, he pointed out.
Initiatives are already underway to resolve such weaknesses through mergers and recapitalisation of such finance companies through strategic investors.
There are also ongoing discussions on the encouragement of licenced finance companies to obtain credit ratings and list themselves on the Colombo Stock Exchange (CSE). This will, in turn, ensure financial stability and operational excellence while creating healthy competition.