Restricting banks from leasing wouldn’t help finance companies: Murtaza


May 26, 2016 (LBO) – Sri Lanka’s government intervention in restricting banks from leasing vehicles would be disastrous for business confidence and further diminish the country’s ability to attract investment from both local and international investors, industry analyst said.

The Finance Ministry wants to ban banks from leasing vehicles below 5 million rupees and similar utterances have also been emanating from the Central Bank.

Murtaza Jafferjee, the chief executive at Colombo-based JB Securities, said in a research note that such an intervention would be diametrically opposite to the PM’s vision of a highly competitive social market economy that aims to improve consumer choice and increase contestability amongst producers.

He said it was questionable whether such an “interventionist measure” will provide a solution to dealing with the solvency challenges of 15 finance companies that are “rumoured to be under stress.”

“Going by the regulators thinking one must stop to ask the question as to whether these firms got into trouble due to competition from banks or their problems lie elsewhere.”

“Most investors look for a predictable policy environment, NOT tax holidays or concessions as some quarters believe,” Jafferjee said.

He said a far better intervention by the regulator is to increase the minimum capital requirement; this will force unviable firms to consolidate.

“There may be NO buyers for some, bankruptcy is the best option,” Jafferjee said.

“Ending the life of an ailing patient is the best outcome when all hope is lost, keeping him going on life support is a terrible burden on him and his family – it similarly applies to a sick firm.”

Jafferjee added that non-banking financial institutions (NBFIs) far more profitable than banks as they recorded a better return on assets (ROA) ratio and Net Interest Margin (NIMs) in 2015.

In 2015 the banking industry recorded a ROA of 1.3 percent and NIMs of 3.5 percent whilst the NBFIs recorded a ROA of 3 percent and NIMs of 8.7 percent.

Below is a table that sheds light on the size of the leasing industry based on data that he furnished.

2015 2014
Size (LKR bn) Share (%) Size (LKR bn) Share (%) Growth (%)
Banks 223 31.2% 148 27.2% 50.7%
NBFIs 492 68.8% 397 72.8% 23.9%
Total 715 100.0% 545 100.0% 31.2%

The above data indicates that the banks grew rapidly clocking in 50 percent growth in their leasing portfolios but the NBFIs also recorded strong growth recording 23.9 percent but since they were growing from a larger base their growth in smaller.

“Nevertheless, NBFIs yet claim a majority share of the market of around 68.8%,” he said.

“The top 10 NBFIs have a market share of 70% of NBFI leasing assets and 48% of industry assets – total NBFIs are around 53.”

Sri Lanka has 46 licensed finance companies and 7 specialized leasing finance companies and the top 3 NBFIs leasing assets are bigger than the largest bank’s leasing assets.

Jafferjee points out that the average ticket size of a car lease is around 1.5-2 million rupees , banks and the larger NBFIs contest in the same market segment, thus restricting competition from banks is to the benefit of larger NBFIs – creating another avenue for rent seeking.

“The smaller firms operate in niche markets both in terms of narrower geographies and riskier segments.”

Consumer welfare should be the primary consideration of any government policy, Jafferjee pointed out.

He added that banks aggressively getting into the leasing business is great news for the consumer and they have more choice, cheaper rates due to competition and one provider for all their financial needs.