CB to get tougher on finance firms

• To go hard at firms failing to meet minimum capital requirements
• To introduce new guidelines to strengthen financial reporting 
• Mulls introducing restrictions on ownership limits

By Nishel Fernando 

The Central Bank is likely to tighten the regulations on Licensed Finance Companies (LFCs) and Specialised Leasing Companies (SLCs) to ensure higher capital adequacy and loan loss provisioning, improved reporting standards and restrictions on ownership limits.

Presenting Central Bank’s ‘Road Map: Monetary and Financial Sector Policies for 2019 and Beyond’, the Central Bank Governor Dr. Indrajit Coomaraswamy on Wednesday asserted that they will be tough on the finance companies, which fail to meet minimum capital requirements.

He also noted that several new guidelines will be issued to strengthen financial reporting of LFCs this year.

“Going forward, the sector needs to cope with enhancement of the minimum capital requirement and higher loan loss provisioning with the introduction of Sri Lanka Financial Reporting Standards 9. 

Further, the change in the regulatory posture of the Central Bank will result in early interventions against noncompliant, distressed and high risk LFCs. 
This will include regulatory action, such as the restriction of business through deposit and lending caps as well as suspension and cancellation of licences. 
Further, guidelines are expected to be issued on financial reporting of LFCs and SLCs. We will also consider issuing directions on the ownership limits,” he said. 
Speaking to Mirror Business, Dr. Coomaraswamy said the Central Bank will allow more relaxed ownership limits on finance companies initially, compared to the existing share ownership restrictions of 10 percent for the banking sector. 

The Central Bank last year introduced new regulations on finance companies to maintain a minimum of 10 percent capital adequacy and it to be increased to a minimum of 10.5 percent by mid this year with a target to reach 12.5 percent by mid 2021. 

“Capital levels of the sector are expected to be strengthened as a result of enhanced capital requirements. The LFCs and SLCs, which are unable to comply, will be encouraged to consolidate on a voluntary basis. 

“Non-compliance will result in restrictions on deposit and business expansion and, where necessary, winding up of businesses. Therefore, it will be necessary for LFCs to give priority to capital augmentation plans in the near future. There will be no regulatory forbearance in this respect,” he stressed.

Dr. Coomaraswamy also announced that the Finance Business Act (FBA) will be amended to facilitate expeditious resolution actions in respect of distressed finance companies.

He noted that as per the provisions of the Finance Business Act (FBA), No.42 of 2011, licenses of two distressed companies were cancelled and the settlement of the liabilities of existing depositors under the Sri Lanka Deposit Insurance and Liquidity Support Scheme (SLDILSS) is currently underway.The performance of LFCs and SLCs slowed down significantly during 2018 due to low credit growth, declining profitability and increasing nonperforming loans.

 “The slowdown in the sector was also a result of moderate economic growth and the impact of natural calamities, such as floods and drought conditions that prevailed in 2017 and the first half of 2018. Policy measures taken to curb excessive demand for vehicle imports also impacted the sector significantly,” Dr. Coomaraswamy said.