The Central Bank (CB), the regulator of both banks and non-bank institutions, has acknowledged that a section of licenced finance and leasing companies operating in the country are undercapitalized and therefore, needs infusion of new capital.

Releasing the ‘Financial System Stability Review 2012’, the CB yesterday noted the upward moving and volatile interest rates had increased the liquidity risk of these entities, which have significant asset and liability mismatches in the shorter end.

Referring predominantly to small finance companies, the CB said there would be peer pressure applied to finance companies and specialized leasing companies with less than one billion rupees asset base (aggregate of Rs.6.6 billion as of September 2012) as they were plagued with lack of funding.

Meanwhile, Fitch Ratings Lanka Limited (Fitch) last week said that elevated liquidity pressures were a risk for all finance companies in Sri Lanka and the reluctance of those companies to infuse more capital to strengthen their balance sheets had resulted in deteriorating the asset quality.

The CB’s review on the sector too showed the requirement to infuse new capital, in order to meet the revised minimum core-capital requirement of Rs.200 million for finance companies in 2013, with a view to promoting the financial soundness in line with the definition of core-capital under BASEL II.

 Mirror Business last February exclusively reported that some of the finance sector companies were withdrawing from their incumbent rating agencies seeking better credit ratings to show less risk.

Finance and leasing companies account for 6.4 percent of the financial sector or Rs.564 billion. The sector saw its profits plunging by as much as Rs.3 billion during the nine months to September 2012, predominantly due to decline in non-interest income and increase in non-interest expenses.

Meanwhile, the CB said the sector profitability could further decelerate due to the fiscal policy measures taken during the beginning of 2012, particularly due to the knock on effect on the leasing portfolio fuelled by increase in duty and fuel price hike.

The Central Bank further added that the finance and leasing company sector would have to face stiff competition from the banking sector because now more banks are diverting from their low risk core business products to high risk products such as finance leases, margin trading and pawning.

There are 45 licenced finance companies and 13 special leasing companies with 836 branches regulated by the Central Bank. During the nine months to September 2012, the sector opened 132 branches, with 20 branches in North and East.