Saga of finance companies
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“Wena monawada karanne. Evala banku-walata wediya poliyak denawa-ne (People have little choices other than to invest in finance companies as they give a better interest income than banks),” noted Mabel Rasthiyadu, picking up some mangoes which had fallen from the nearby mango tree. The trio had gathered under the margosa tree for their regular Thursday meeting chat over a cup of tea.
The crisis befalling finance companies has once again come under public scrutiny, this time with the cancellation of the licence of The Finance Company (TFC) last month.
As the trio continued their conversation, the phone rang. It was ‘Reconditioned’ Ranjith – a know-all in the second-hand car market, whose business had also crashed with the COVID-19 pandemic. “I say….….finance companies seem to be in real trouble these days,” he said, responding warmly to my initial greeting. “The problems facing finance companies are a never-ending crisis,” I said.
“That’s because mostly pensioners and those close to retirement prefer to invest their hard earnings in finance companies which give a better rate of interest,” he said. “That may be the case, but there is always a risk involved in investing in not-so-familiar companies,” I said, adding that the Central Bank (CB) has persistently warned the public against investing in some dubious finance companies.
The consistent public response to warnings by the CB has been that licensed finance companies are regulated by the banking regulator and thus the latter has a responsibility to ensure these companies don’t fail. But the CB, in a recent statement responding to growing criticism of its role in regulating these companies, said that these institutions are managed by boards of directors and key management personnel, which take independent business decisions and take full responsibility of managing the business. Such business decisions may lead to the failure of such institutions, despite continuous regulation and supervision by the CB.
Ever since the 2008 collapse of the unregulated Golden Key Credit Card Co., which attracted thousands of depositors owing to its high double digit interest rates, the finance companies’ sector has faced a multitude of problems.
Among companies that have collapsed over the years and where depositors are struggling to recover their money are Central Investment and Finance PLC (CIFL), TFC, ETI, Standard Credit Finance Ltd (SCFL), City Finance Corporation Ltd (CFCL) and Multi Finance PLC. In the case of the SCFL, TFC and TKS Finance Ltd, depositors have been paid up to Rs. 600,000 under the CB’s deposit insurance scheme, while deposits above that would be settled only after the assets of the companies are sold.
Some comments by CB officials have also aggravated matters. A top CB official at a recent media briefing said that 20 of the 42 licensed finance companies in Sri Lanka were presently facing liquidity issues with some in severe distress with a high percentage of non-performing loans. By not naming the companies, that statement sent shivers of uncertainty through the entire sector, with many worried about their investments even in secure institutions. On the contrary, naming the companies would have created a run on the deposits of these institutions.
The CB in its recent statement reiterated the requirement for enactment of a legal framework to regulate unregulated moneylending activities so that a better and more effective regulatory environment is created for moneylending institutions in the future. “Hence the need for the enactment of the proposed Microfinance and Credit Regulatory Authority Act, approved by the Monetary Board of the CB is vital,” it said.
Over the years, the CB has been battered over its handling of finance companies as these institutions got into deeper problems with the portfolio of non-performing loans increasing, a situation that has been exacerbated by the COVID-19 pandemic which has worsened the financial problems faced by the business community.
Complicating the problems, the CB recently issued a directive to all finance companies, extending the age of retirement of their directors to beyond 70 years, citing the COVID-19 crisis and the inability to find experienced people to serve in these positions. This prompted a depositor in a finance company, in a letter published today in this section, to bitterly criticise the move saying that while the CB has publicly admitted that several finance companies are in serious trouble, “by this directive the Central Bank is allowing the very same people responsible for the mismanagement of these finance companies to continue even after their retirement age. The Central Bank is rewarding them by a further tenure, instead of holding them accountable for their actions”.
In mid-2019, the CB announced plans to restrict ownership limits and ensure higher capital adequacy and loan loss provisioning amidst, improved reporting standards, releasing a concept paper introducing ownership limits of the finance companies to 25 per cent within five years. How far this proposal has moved forward remains to be seen. According to CB data at that time, more than 50 per cent of shares in 30 firms were owned by the main shareholder and in eight firms the ownership was limited to the main shareholder and related parties, while two shareholders controlled two companies.
Merging and consolidation of smaller companies have been under discussion for many years. In the meantime, in another step to weed out weak finance companies and encourage consolidation and mergers, capital requirements have been enhanced and all licensed finance companies are expected to meet the Rs. 2.5 billion capital requirement by January 2021 from Rs. 2 billion, a requirement since January 2020. However, due to the COVID-19 crisis, these requirements have been extended by another year.
Interest rates are coming down in a measure by the CB to stimulate economic activity and increase post COVID-19 loan growth and this puts further hardships on depositors who depend on their interest income to survive. Lower interest rates mean lower income for many who are compelled to plough their earnings into finance companies where the interest rates are higher than those offered by banks.
Sipping my second cup of tea, I reflected on the need for a proper mechanism, even the appointment of a special committee with CB involvement to find a long-term solution to the crisis befalling finance companies and end the misery and uncertainty faced by thousands of depositors.