CB to get tough on errant finance firms

The financial sector regulator, the Central Bank (CB), is drafting a comprehensive resolution framework for all financial institutions to introduce tougher measures against errant institutions beyond cancellation of licence. 

“We are in the process of drafting a comprehensive resolution framework to cover all financial institutions supervised by the CB. 

In addition to the initiatives that have been already taken to resolve the distressed and high-risk companies, the proposed resolution framework envisages several measures beyond mere cancellation of licence,” CB Governor Prof. W.D. Lakshman revealed. 

The proposed measure is aimed at strengthening the resolution framework and safety net mechanism of financial institutions.

Meanwhile, the CB also plans to reinforce the stabilisation of the country’s financial sector with the proposed changes to the Finance Business Act (FBA).

“We propose to issue directions on ownership limits for licensed finance companies (LFCs), giving a reasonable time horizon for the implementation, with flexibility on ownership limits for investors who invest in distressed companies expecting to restructure such companies,” he noted. 

The LFCs and specialised leasing companies (SLCs) were marred by sluggish performance throughout last year. 

The non-performing loan (NPL) ratio of the LFC sector edged up to 9.8 percent in October last year, from 9.69 percent in September.

The sector’s profitability slumped to Rs.4.7 billion during the first half of last year, compared to Rs.11.2 billion during the corresponding period in 2018, amid the rising interest expenses, sluggish loan growth and significant uptick in loan loss provisions.

“Negative credit growth, declining profitability and an increase in non-performing loans are seen as some of the sector characteristics. Subdued economic growth and commercial activities impacted by the Easter Sunday attacks and political instability ahead of the presidential election, mainly contributed to this dismal performance,” Prof. Lakshman added.