Finance companies to fuel economic growth whilst safeguarding depositors

Tuesday, 13 August 2013 01:10 -     - {{hitsCtrl.values.hits}}

The 2008 financial crisis in Sri Lanka will go down in history as an averted crisis, due to the timely steps taken by regulators. Its genesis was similar to the earlier ones, where one or two major finance companies failed. In earlier instances the collapsed companies were closed, and depositors lost their money, with no protection from any source. In 2008 the crisis hit the market with the collapse of unregulated financial entities which accepted public deposits through Ponzi schemes despite the warnings given by the regulator from time to time. In Sri Lanka not a single finance company was allowed to wind up operations by the regulator which provided guidance to resurrect its operations and pay depositors in licensed finance companies. Directors and management were made personally liable by the new regulations put in place to ensure the resurrection of the companies. It was the Central bank of Sri Lanka that averted the crisis with timely action. Unlike in the US, tax payer funds were not used to bail out anybody. The Central Bank simply used the public goodwill of state and private banking institutions to restore credibility by appointing managing agents etc. The strategy, used by the Central bank was to transfer the public goodwill of credible public and government brands, to be associated with the affected institutions; this has helped regain the lost credibility of affected LFCs. Of course the immediate fire fighting was followed by restructuring of the management and the Boards of Directors and it is to the credit of the Central bank and the Monetary Board that the rehabilitation packages are working, slowly but steadily. The crisis in Sri Lanka, came in the wake of the mega-scale financial crisis in the US markets, with one of the biggest names in finance Lehman Brothers failing and panic overtaking the financial markets, only to be bailed out by the US Federal Reserve Bank by injecting $ 9.0 billion of tax payer money into the system. In the US, money and capital markets collapsed, millions lost jobs and millions of foreclosures in housing loans deprived the average man of their life savings. The crisis spilled over to the rest of the world and threw the global economy into a recession. In that context Sri Lanka not only averted the spill over from the global crisis, but also tactfully handled its own local crisis without severe casualties in the regulated financial sector. It is in that context the Central Bank has now intensified and broad based the regulatory framework for licensed finance companies (LFCs), ensuring their sustainability, stability and public confidence. Further, the Finance Company Act of 1988 was repealed and replaced by the Finance Business Act No. 42 of 2011 where LFCs were required to secure listings in the stock market and maintain liquidity ratios, core capital and capital adequacy ratios in addition to introducing a mandatory deposit guarantee scheme which is now in effect, providing additional comfort to depositors. Further, the Central Bank has also approved a credit guarantee scheme for bank loans for LFCs that have severe liquidity constraints. LFCs also are subject to regular direct on-site supervision by the Central Bank and are backed up with off-site supervision through a system of regular reporting of their operations. It would be clear from the above, that the LFCs are now on par with licensed commercial banks (LCBs) with respect to CBSL supervision. The new code of ethics brought on by the Finance Houses Association of Sri Lanka which is a guideline for business operations of member finance companies in terms of customer services, confidentiality of information, legal obligations, employee recruitment, competitive initiatives and projecting the finance industry image will be used to further support the Central Bank’s efforts to ensure public trust and confidence. As part of the ongoing process of refining governance of the financial sector at large, LFCs too are required to conform by adopting the IFRS framework in reporting annual accounts. The Central Bank is currently assuming a leading role in overseeing industry transition and seeks to address areas of concern and ambiguities. The LFCs primarily cater for a segment of the public such as, micro enterprises and SMEs, who do not have access to mainstream banking, in view of the paucity of bankable collateral. It also needs to be understood that It has been the NBFIs who for generations have groomed the marginal borrowers into the ways of the credit culture, eventually rendering them eligible for accommodation in the more elitist banking sector and has eventually uplifted the earning and living standard of that segment which has been a large contributory factor to the growth of the economy and the employment ratio, empowering self employment. Compared to banks, although loan disbursements are not sizable the numbers are large due to its small case values. A positive perception of the industry in the eyes of public and private entities is vital to the survival and prosperity of all players involved. Additionally, prudent and timely decisions need to be made at a governing level to halt harmful influences from tarnishing the industry. The Central Bank of Sri Lanka along with the Finance Houses Association of Sri Lanka are tireless in their efforts to properly streamline and guide industry operations thus ensuring strong growth in the sector. Its monitoring of the industry is quite strict in safeguarding the interests of depositors and has even taken upon itself to instruct firms on which areas public funds should be invested. This further ensures proper corporate governance and an ideal mix in investments, which in turn has resulted in a smooth running of operations. LFC’s have had mixed fortunes in the market just like any other industry. However the sector has contributed immensely to eliminate poverty and increase land ownership and the living standards of the public, thereby proving beyond doubt that its role in the economy has certainly outweighed these temporary drawbacks.