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Sri Lanka finance companies urged to consolidate, no new licenses
04 Dec, 2012 14:13:00
Dec 04, 2012 (LBO) - Sri Lanka will not issue new finance company licenses in the next two years but is urging weaker lenders to consolidate with larger stronger ones, Central Bank Governor Nivard Cabraal said.
"The Monetary Board (the Central Bank's decision-making body) has taken a decision not to give new license in the next two three years unless they are absolutely necessary," Cabraal told a forum of finance company executives in Colombo.

"We will encourage mergers and consolidation. Weak companies cannot remain as weak companies.

"If they are weak they will have to be swallowed by the strong. Or they will have to become strong."

Credit Cycle

People Leasing Company, Sri Lanka's largest leasing company was given a finance company license on the condition that it merges with a smaller firm it had taken under its wing.

Cabraal said the regulator will assist companies which are still weak to put their house in order.

Sri Lanka's finance companies ran into difficulties in 2009 after a prolonged period of loose fiscal and monetary policy which began late 2004, where state spending and credit rose but interest rates were held down, eventually ending in a balance of payment crisis.

When rates were finally raised after inflation hit 29 percent, many finance companies went under, with a property bubble also bursting.

The Central Bank took action to fix several finance companies and also restore confidence preventing further runs.

The firms typically give finance leases, hire purchase, pawning and sell land and houses on installments.

Financial Inclusion

Sri Lanka's so-called finance company play in the sub-prime market reaching clients that cannot easily get credit from mainstream banks.

Finance company assets had grown 564 billion rupees in the year to September 2012 from a year earlier, on the back of a 29 percent growth in the 12 months to September 2011 according to Central Bank data.

Lending had reached 451 billion rupees by end September 2012 up 26.6 percent on top of a 48 percent growth in 2011.

Deposits had grown 28 percent to 233.6 billion rupees on the back of a 31 percent growth the year before.

Cabraal said 19 firms had grown over 100 percent during the past two years. There were 46 licensed finance companies and 13 specialised leasing companies.

Cabraal said finance companies had 6 percent of total finance sector assets, but they were a very important part of the citizenry who sometimes could not reach the standard imposed by the formal banking sector.

"The six percent that you reach out to will be six percent and that otherwise will be left behind," Cabraal said.

There were slight signs of stress with non performing loans increasing but they have "remained within manageable levels" Cabraal said.

Stress Management

In late 2011 Sri Lanka's bank liquidity tightened as the Central Bank defended a dollar peg, potentially nipping in the bud what would have been an extended period of loose monetary policy which would have allowed a property bubble to develop and more risky loans to accumulate.

Total NPLs have climbed to 22.5 billion rupees by end September 2012, up from 19.7 billion rupees a year earlier, but had fallen to 5.0 percent of total loans from 5.5 percent.

Finance company sector non performing loans rose as much as 9.7 percent in 2010 from 9.2 percent in 2009 following post-2004 loose fiscal and monetary policy cycle.

But he said the finance companies should be strong and risk management systems and corporate government should be improved. He said the regulatory reforms were being planned.

Update II

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