VAT affects finance companies negatively

The value added tax (VAT) on finance leases and financial services at 15 and 20 percent has made a negative impact on finance companies, according to an expert in this field.“Finance leasing has now become costly as a result of this and repayments by the customers are likely to be affected adversely,” Kithsiri Wanigasekara, who after 27 years of service recently resigned as Chairman and Managing Director of Kandy-based Sinhaputhra Finance (Pvt) Ltd., said.

He said that the high rates of interest on lending facilities that prevail now will lead to increase in non-performing loans and is likely to enhance provision for doubtful debts in the near future and reduce profitability of finance companies. “Further difficulties encountered by businesses and borrowers at present due to economic hardships will aggravate the position. The prevailing high interest rates on deposits also compel finance companies to offer high rates of interest on deposits thus resulting in the erosion of margins and profitability,” he said, adding that the current year will be a challenging one for the industry.

He said the industry contributes significantly to the informal/rural sector in the economy and that the main beneficiary is the passenger and goods transportation sector. Wanigasekara said the industry has grown at a rapid rate over the last several years due to the very high demand for passenger and goods transportation vehicles. “Since the public transportation sector cannot cater to the entire demand that is prevailing in the market, the finance firms have a major role to play in providing leasing facilities on motor vehicles for the private passenger transportation sector,” he said.

He said the industry comprises 32 Central Bank registered finance companies which has a total assets of Rs.113 billion and public deposits of Rs.58.8 billion as at December last year, according to the regulator's statistics. Wanigasekara said the Central Bank’s permission to operate savings accounts and accept savings deposits from the public should pave the way for finance companies to bring down cost of funds. “This is likely to assist them to overcome the competition from other institutions that offer facilities at low rates of interests,” he said.

He said the industry can be improved by improving the ability of finance companies to offer facilities to prospective customers at competitive interest rates. For this purpose finance companies will have to obtain low cost funds through time and savings deposits. Further the strengthening of capital base of each company with the infusion of new equity should be a priority.

He said the advantages in investing in finance companies as opposed to banks is that the depositor is to obtain a comparatively high rate of interest on deposits in relation to banks but at a high risk since bank deposits are considered to be less risky.

Wanigasekara noted that the industry has high potential for growth and this depends mainly in the professional management of the institutions. “The ability of finance companies to offer competitive rates of interest on lending to customers will guarantee good lending portfolios that will generate sufficient interest income to deliver sound financial performances,” he said, adding that towards this, mobilisation of savings deposits with the operation of savings accounts should be a priority on the agenda of each finance company.

“The finance companies are now authorised to operate savings accounts for the public and the cost of funds of finance companies could be reduced significantly if this tool is utilised effectively by the finance companies. This will guarantee good interest margins and in turn and better prospects for finance companies and to the industry,” he reiterated.