CB gets tough on errant finance companies

Monday, 3 February 2020 01:27 -     - {{hitsCtrl.values.hits}}


  • Monetary Board decides to cancel The Finance license after multiple attempts to find investor fail

  • CB decides to give relief to 135,000 or 94% of depositors

  • Estimates 20 finance companies struggling to meet regulatory requirements 

  • No banks penalised for missing year-end interest target due to swift compliance 

  • CB says released full report on five completed forensic audits to Speaker 

  • Process to start sixth forensic audit still underway

By Uditha Jayasinghe 

The Central Bank over the next few months is planning to reach out to as many as 20 finance companies that have been struggling financially to discuss solutions, including possible mergers, and may even take tough measures on those that have been in financial trouble for a number of years.

During the press conference to discuss the monetary policy stance by the Central Bank last week, Deputy Governor H.A. Karunaratne told reporters that the license of The Finance Company (TFC) is likely to be cancelled, after the company failed to attract new investors despite calling for a fresh round of Expressions of Interest (EOIs) in December.  

Central Bank Deputy Governor H.A. Karunaratne

Despite the initial announcement of license cancellation in October by the Central Bank, TFC had received approval to publish new EOIs to seek an investor who could invest Rs. 25 billion to resuscitate the company. But these had been unsuccessful, with the Central Bank now moving forward to wind down the company.  

“We have already taken a decision on The Finance from the Monetary Board, because it is not viable to continue the business. To resurrect the company there are a few options; one is either we need to see a new investor, or there should be injection of funds from the Government or Central Bank,” Karunaratne said. 

 “Central Bank cannot inject any funds, and we have not seen any investor for this particular company. So therefore our option is to go ahead and cancel the license. Right now we are looking to see whether the Government is willing to consider any other options, but if not we have to go ahead and cancel the license.” 

The Deputy Governor emphasised that cancelling the license will be beneficial for many depositors, who have been unable to recoup their money for a long period of time. 

“There are also a large number of depositors who are regularly requesting their funds. When you look at the total picture of The Finance, altogether we have 145,000 depositors, out of that 134,000 depositors have funds less than Rs. 600,000, and so if we cancel the license, we can help 94% of the depositors.” 

The monetary institution is expected to inform the Finance Ministry, as a point of courtesy, before proceeding with winding down operations on TFC. 

In September, the Central Bank took similar steps on TKS Finance after cancelling its license in July 2019. The Central Bank said the decision was taken due to “deficient capital level, poor asset quality, continuous losses and failure in repaying depositors’ money on demand or at maturity,” as well as other regulatory failures. Measures were taken to repay TKS depositors using the depositors’ insurance scheme. 

Karunaratne also acknowledged that of the 42 licensed finance companies and six leasing companies currently operating in Sri Lanka, as many as 20 were financially struggling, and the Central Bank would discuss with them on how they could improve their balance sheets and compliance with regulatory requirements. He also said while finance companies had requested to be part of the moratorium announced by the Government, the nature of their businesses made it challenging to include them in the policy. 

Responding to questions, Senior Deputy Governor Dr. Nandalal Weerasinghe said despite the announcement last month of the Monetary Board readying to penalise eight banks for failing to meet the deadline of reducing lending rates, no such step was taken.   

“They complied during a short period of time, so we did not impose any penalties on the banks. If banks do not comply for a significant period of time, depending on the violation, we decide whether to take action. I think naming and shaming works. The response from banks was very swift.”

He also said the Central Bank has already released the full reports on the forensic audit conducted on bond sales to Speaker Karu Jayasuriya, and any missing documents were not caused by the Monetary Institution. Dr. Weerasinghe also declined to comment on any findings detailed in the reports, insisting it was beyond the mandate of the Central Bank.

Central Bank officials also said the process to begin the sixth audit report was already underway.    

“Right now under the new process, the Cabinet Appointed Tender Committee had published all the relevant documents and called for bids from a number of parties, and the financial bid component has also been completed. The financial bid was opened on Friday, after which we have to do price negotiations, and then inform relevant authorities on the current position because it is linked to the court decision as well. Before we take any decision, we need to inform the court as well. We are following procedure,” Deputy Governor Karunaratne said.