Five-year consolidation plan for NBFI sector

• Under the plan, CB wants number of NBFIs to be reduced to 25 from current 40
• CB appears to be wanting a few companies with prudential requirements well above minimum levels 
• NBFI sector woes exacerbated by COVID-19 pandemic
• Sector NPL ratio remains elevated at 13.9%, nearly thrice the banking sector

The Central Bank says it would put in place a five-year consolidation plan for the non-bank financial institution (NBFI) sector, embarking on a time-bound execution framework to reduce the number of finance companies to 25 from the current 40. 

This is the first time the regulator has come explicit on its precise goals and targets for the sector with clear time lines as part of its broader financial sector consolidation agenda. 

While the NBFI sector was indirectly forced into consolidation by way of elevated minimum capital levels and capital adequacy requirements imposed a few years ago, which in fact saw a few companies seeking merger partners, the said plan will stipulate time-bound framework towards reducing the number of NBFIs to 25 within 5 years. 

According to the plan, the Central Bank wants a few companies with each having prudential requirements well above the minimum levels with diversified business models. 

This is among a slew of regulatory reforms in the pipeline for the sector, which has shown some cracks during the last five years, exacerbated by pandemic-induced economic headwinds. 

For example, the NBFI sector non-performing loans are estimated at 13.9 percent of its total assets, which is nearly thrice the level of the banking sector. 

Meanwhile, sector assets dwindled last year as loans and advances saw a de-growth of 5.7 percent amid anemic growth for loans and stiff competition from banking counterparts who offer better deals due to their relatively easy access to low cost funds and more than adequate liquidity. 

Among other regulatory reforms earmarked for the sector, the Central Bank aims at amending the Finance Business Act and the Finance Leasing Act. The Central Bank will also enact the much awaited Microfinance and Credit Regulatory Authority Act and will develop a regulatory framework in line with the Act to provide rigorous oversight on moneylenders. 

Also, the Central Bank will revise the existing Direction on the corporate governance of licensed finance companies. 

Further, the Central Bank is expected to introduce directions to facilitate fintech solutions including e-money systems and mobile payment systems. 

Meanwhile, at the broader level, the Central Bank will revise the directions on the NBFI sector in line with the current market developments and will issue new directions on the required regulatory areas as part of its broad based regulatory reforms on the sector.