Budget 2016: Financial Institution Restructuring Agency to help troubled finance companies

The unity government’s maiden Budget presented last week offered a lifeline for troubled finance companies subject to certain conditions.

At present there are 47 finance companies registered with the Central Bank of Sri Lanka, considerably less than a year earlier thanks to ‘directed’ mergers or acquisitions (M&As) of finance companies under the previous regime. 

Before the new Government suspended the initiative pending review, up to November 2014 as per the then Central Bank announcement, 41 Non Bank Financial Institutions, and nine banks have confirmed their consolidation plans. Out of this, eight NBFIs and two banks have already completed their respective consolidation plans, whilst 33 NBFIs and seven banks are still progressing and are in different stages in their plans. 

However in the 2014 Annual Report of the Central Bank it was stated that 10 LFCs and SLCs completed their respective consolidation plans whilst 22 LFCs and SLCs were progressing on the agreed consolidation plans.

A long term loan on concessionary terms was provided from the Sri Lanka Deposit Insurance and Liquidity Support Fund to stabilise The Finance Company PLC and to move to a profitable level was also a feature in 2014.

Despite relatively improved financial health of the finance company industry following M&A, Finance Minister Ravi Karunanayake on Friday during the 2016 Budget presentation told Parliament that the last decade witnessed many financial companies in crisis. 

“The impact of this crisis was felt in every corner of the society and our financial sector stability was strained. Depositors were badly let down. The Central Bank of Sri Lanka which was entrusted with the supervisory function had failed in its role as the independent regulator through the compromise of its legendary independence due to politicisation,” Karunanayake said.

He said finance companies have been most vulnerable and the Government had to provide relief to the Golden Key Depositors at a heavy cost. To find a long standing solution for this issue, the 2016 Budget has proposed a Financial Institution Restructuring Agency (FIRA) on the lines of the Resolution Trust Corporation in the United States of America to help failing finance companies to be recapitalised and their troubled assets to be taken over by this agency for purposes of restructuring. 

The Finance Minister said a wide differential between the deposit and lending rates is seen in the low efficiency financial sector which has caused high cost of intermediation to the public and businesses in Sri Lanka. 

The Government will provide initial capital of Rs. 10 million as equity and also issue a Treasury bond to the value of Rs. 25 billion with a tenure of five years for the FIRA. The Central Bank will be entrusted to undertake strict supervision on the restructured finance companies. However, as a prelude to the above proposal in order to provide the depositors with a sense of comfort and security, the Central Bank of Sri Lanka will give a 100% guarantee on all deposits of all the registered finance companies by end January 2016.

To prevent undue concentration of deposits in the non-bank financial sector, Budget 2016 also proposed to impose a cap on the interest rates offered by the Finance Companies.

Further, the Government will protect the public who have got into difficulties in the payment of the high rates of interest and penalty charges levied by financial institutions on credit cards and other personal lifestyle loans. 

To ensure this process, the Central Bank will, in association with all other banks operating in Sri Lanka, expand the credit counselling activities. We expect the Central Bank has been asked to issue directions that will restrict the ability of financial institutions to grant unlimited amounts of expensive credit to unsuspecting borrowers.

Finance and specialised leasing companies’ capital funds increased by 20.9% to Rs. 114 billion as at end of 2014, compared to an increase of 9.6% in 2013 mainly due to internally generated funds, that is profits. The capital adequacy ratios of the sector remained above the required minimum levels although it decreased due to growth in the risk weighted assets. The total capital adequacy ratio (as a percentage of risk weighted assets) decreased to 13.5% as at end of 2014 from 14.8% as at end of 2013. 

The core capital ratio (as a percentage of risk weighted assets) too decreased to 13.0% in 2014 from 13.5% in 2013. Similarly, the ratio of capital funds to total deposits of LFCs also decreased marginally to 22.9% in 2014 from 23.3% recorded as at end of 2013.