Sri Lanka’s 39 Licensed Finance Companies (LFC) have been directed to mind its own financial stability as regulation and supervision of the Central Bank does not necessarily prevent the failure of any financial institution, the Central Bank informed.
According to a Fitch rating agency estimate, LFCs would require additional equity capital of around LKR 5.5 billion (USD 30 million) to meet the absolute regulatory capital thresholds by 1 January 2021.
Fitch believes that generating this internally through profit may be difficult and therefore might require additional external capital raising. Capitalisation factors are likely to remain a prominent rating sensitivity for most of our rated standalone LFCs.
However the management of LFCs has the ultimate responsibility to operate them in a safe and sound manner while complying with regulatory and supervisory requirements, the Central Bank clarified.
Adding that the Central Bank has no legal authority to guarantee deposits of LFCs, the CBSL said they had notified all these companies that they are required to insure their deposit liabilities with the Sri Lanka Deposit Insurance and Liquidity Support Scheme (SLDILSS) established by the CBSL.
Currently, the maximum compensation of LKR 600,000 per depositor, per institution will be paid by SLDILSS in the event of a suspension/cancellation of any LFC.
General public are hereby informed that no other instruments other than “deposits” will be covered under SLDILSS.
To assist public in making informed decisions, LFCs are required to disclose key financial information/indicators in the press every six months in terms of the regulations issued under FBA. Further, attention of the public is drawn to the positive relationship between the risk and return of any investment including deposits.
The CBSL further advised to exercise due care when making deposits in LFCs to ensure the safety of their funds and also to refrain from depositing funds in unauthorized institutions/persons and institutions that are non-compliant with the minimum capital adequacy requirement.
The CBSL stated that eight licensed finance companies, namely, Arpico Finance Co. PLC, Associated Motor Finance Co. PLC, Bimputh Finance PLC, Kanrich Finance Ltd, Merchant Bank of Sri Lanka & Finance PLC, Richard Pieris Finance Ltd, Softlogic Finance PLC and UB Finance Co. Ltd found non-compliant with the minimum capital adequacy requirement and has been given time extension to rectify the non-compliance.
Furthermore, the CBSL stated that Nation Lanka Finance PLC is found to be in non-compliance with the minimum capital adequacy requirement and the licensed finance company is yet to submit a feasible capital augmentation plan.
The non-banking financial industry of Sri Lanka has grown rapidly and the entire asset base of the Regulated Finance Companies RFC’s stood at LKR 622 billion in 2013.
Within a span of six years, it escalated up to LKR 1.39 trillion. During the same period, loans and advances of the (RFC’s) have grown to LKR 1.066 trillion from LKR 471 billion.
This 60-year-old industry accounts for around seven million customers at present in the form of 57-60 percent borrowers and 40-43 percent depositors while it houses about 32,000 employees.
The NBFI industry is funded mainly through public deposits (50-55 percent), bank borrowings (25-30 percent) and shareholder’s capital infusion (8-12 percent).
It consists of 31 listed and 8 unlisted finance companies. While 85 percent of the industry is dominated by the top 16 companies, which accounts for over LKR 20 billion in assets, the balance 15 percent is shared by the remaining 23 companies.