Credit ratings now compulsory for finance companies
View(s):Credit ratings by reputed rating agencies have been made compulsory for all licensed finance companies by Sri Lanka’s banking regulator with the aim of ensuring financial stability and operational excellence while creating healthy competition, Central Bank (CB) sources divulged.
The CB has directed all licenced finance companies to enter into an agreement with reputed credit agencies by April 30 and obtain credit ratings for the entities and inform the bank’s non bank supervision department soon.
In a circular issued by the department’s Acting Director W. Ranaweera, it stated that all licenced finance companies should obtain the credit rating for the entities and publish it by October 1.
According to Mr. Ranaweera, these companies should publish the rating in all of their advertisement soliciting deposits and debt from the public in newspapers, the corporate website, financial statements and at the business places.
Credit ratings should be updated at least annually and the rating report should be submitted to the department, within one month from the date of issuance of the report, he added.
Finance and leasing sector is under asset quality pressure arising from competitive environment, unfavourable weather conditions and profit decline due to higher funding and credit costs.
Some of these companies are engaged in term or capital financing and facing risk due to larger transaction amounts and poor collateral such as third-party guarantees or post-dated cheques, CB sources said.
The CB’s directive is favourable and should be welcomed by all stakeholders as it gives an independent opinion on the credit-worthiness of the entity, Kithsiri Wanigasekara, immediate past president of the Finance Houses Association of Sri Lanka (FHASL) said.
The credit rating is an independent and unbiased opinion on the ability and compliance to honour debt commitments on schedule; he said adding that it gives the necessary checks and balances.
Credit rating from a reputed agency will be beneficial for finance companies when issuing debt instruments such as debentures and bonds as well as when going for listing in the stock market, he noted.
However he noted that the fee to obtain a credit rating from an agency depends on the asset base of the company and it will not be a massive amount.
Director/CEO of Asia asset Finance Ltd Rajiv Gunawardena pointed out that several licenced finance companies have already resorted to the practice of publishing credit ratings and it is not a financial burden for any of the companies.
He said that stakeholders including depositors and employees as well as prospective clients would be able to judge the credit worthiness and financial position of the company through its single digit rating without going through the complicated balance sheets.
Credit rating agencies estimate the ability of an organisation to fulfill its financial commitments when they fall due (basically the ability to repay debt) and its important for the finance company sector, he emphasised.
A senior CB official said that that the rapid growth and broad outreach of the non bank finance sector necessitates 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. (Bandula)