Home / Columnists/ Towards a stable and competitive NBFI sector

Towards a stable and competitive NBFI sector


Comments / {{hitsCtrl.values.hits}} Views / Friday, 17 June 2016 00:00


 BUP_DFTDFT-8

 

The Daily FT reported that the Minister of Finance had proposed to set an upper limit of Rs. 10 million on banks to do leasing business, to which the heads of the commercial banks had protested during their meeting. 

The top 10 NBFIs account for 70% of the estimated over Rs. 700 billion leasing market whilst the banks handle the balance or Rs. 220 billion. This decision may be totally contrary to the Government policy on developing the economy with a vision of a highly-competitive social market economy that aims to improve consumer choice and provide a platform for innovation. 

Also, banks like HNB and NTB expanding aggressively into the leasing business can offer better options and better rates and most companies still prefer one provider for all their banking services. 3

The Minister of Finance on the other hand knows the challenges facing the NBFI sector and knows the importance of a vibrant and stable NBFI sector and also the role they play in financial inclusion. In fact, one of the most intensely-debated issues more behind closed doors rather than publicly has been the stability of the NBFI sector. 

Sri Lanka’s financial sector regulator in 2014 pushed for the amalgamation of the financial sector in the country. The current 50+ NBFIs only account for only 7% of the financial system’s gross assets, but millions are served by this sector. 

The Central Bank’s Master Plan in 2013 was an attempt to prevent further costly and painful failures of finance companies. Therefore, it is rational to conclude that an overarching objective of the plan was to address one of the key weaknesses and risk in the overall financial sector, which we have still not fully addressed. 

However it is also equally important to ask why so many licenses were issued in the first place and why certain mismanaged financial institutions instead of being charged for reckless misconduct were given safe passage through the consolidation process. 

The past failures of some finance companies have clearly shown that the failed or struggling NBFIs were engaged in risky business models and lacked governance. What the regulator has done so far to address these issues needs constant monitoring by those responsible for the sector, especially the Ministry of National Policy and Economic Affairs.

 



Need for stronger NBFIs

Given the challenges faced by the NBFI sector, the recommendations made in 2015 to enhance capital buffers on a properly-enforced time plan must be accelerated and those NBFIs that fail to meet those thresholds must be restricted from accepting deposits. 

This will pave the way for stronger NBFIs and their ability to attract cheaper and longer-term funding and improved cost efficiencies. This would also help to improve the credit profile of the NBFI sector in light of its lending focus on sub-prime customer segments. The reduced number of institutions would also improve regulatory oversight for the Central Bank. 

It would be a misconception however to think that the reduction in the number of financial institutions resulting from the consolidation would reduce the workload for the CBSL. The regulatory and supervisory function of the CBSL would now have to be conducted at a much higher level with greater technical and financial acumen. 

The economic and political rationale for the consolidation in the Non-Bank Financial Institution (NBFI) is beyond question. However, it is incumbent upon directors of financial institutions to be firstly and secondly mindful of their primary fiduciary duty to ensure the safety and soundness of the institutions they govern. There is definitely a cultural and standard failing in the NBFI sector from running unacceptable risks with public money to mis-selling. Given the woes of the balance sheets of some of the NBFIs, the Central Bank must ensure that the NBFIs stick to proper guidelines and follow risk management and governance practices.

The sector needs to be regulated well to prevent them from looking for unconventional and risky business to grow their balance sheets, otherwise the fallout from this sector could disrupt the entire financial system in the future. There is a lot of experience to get and follow from countries like India and Malaysia to help this sector to get their act together fast and contribute further.

(The writer was a Bank Chairman and Director from 2003 to 2014.) 


Share This Article

Facebook Twitter


DISCLAIMER:

1. All comments will be moderated by the Daily FT Web Editor.

2. Comments that are abusive, obscene, incendiary, defamatory or irrelevant will not be published.

3. We may remove hyperlinks within comments.

4. Kindly use a genuine email ID and provide your name.

5. Spamming the comments section under different user names may result in being blacklisted.

COMMENTS

Today's Columnists

Assessment of fitness and propriety of directors and officers

Friday, 13 December 2019

In the early ’80s, a businessman turned financier from the hill capital started a public deposit canvassing drive by offering 20% interest per month. The depositors were offered on the spot payment of 20% as interest for the first month for their d


How to select top officials to public corporations

Friday, 13 December 2019

It is commendable that the President wants to select suitable decision-makers to public corporations without them being mere and ad hoc political appointments. However, the process thus far seems somewhat weak. Various people are complaining about th


De-stigmatising sexuality education for gender equality – it is a right

Friday, 13 December 2019

International Day for the Elimination of Violence against Women, which fell on 25 November, started the 16 Days of Activism against Gender-Based Violence. It is an annual international campaign that runs for 16 days until 10 December (Human Rights


Presidency and Sangha: virtuous or villainous duo?

Thursday, 12 December 2019

President GR should be ever indebted to the Sangha, because without its tireless canvassing he would not have achieved what he did on 16 November. Given the volatile ethno-religious cleavages and unpredictably shifting alliances in the country, it wa


Columnists More