Central Bank sketches new road for finance companies

Saturday, 18 January 2014 00:00 - - {{hitsCtrl.values.hits}}

Sets out timeline for mergers, warns of strict monitoring, wants foreign banks to play larger role

Aiming for a prosperous future, the Central Bank yesterday unveiled its Master Plan on Consolidation of the Financial Sector grouping the existing 58 finance companies into three categories and giving a timeline for the mergers to take place.

The hefty closed-door presentation was delivered by Central Bank Governor Ajith Nivaard Cabraal, with it being posted on the Central Bank website shortly afterwards. According to the lengthy string of slides, Cabraal outlined the new path for the finance companies by tracing the previous “costly” mistakes and insisted that other countries such as Malaysia had reaped significant benefits from consolidation. Currently Non-Bank Finance Institutions (NBFIs) constitute 7% of Sri Lanka’s entire finance sector. However only 10 companies have an asset base higher than Rs. 20 billion while a staggering 40 have less than Rs. 8 billion. “In this background, pre-emptive strategies are needed to establish a strong and dynamic banking and NBFI sector in the future. Capital will have to be increased in order to ensure that sufficient buffers are built during good times, to strengthen resilience of the financial sector. The banking and NBFI sectors will have to be consolidated through mergers and absorption of businesses,” he told the gathering. Accordingly, the companies will be banded into three categories titled A, B and C. NBFIs with assets more than Rs. 8 billion and core capital more than Rs. 1 billion and have a high degree of regulatory compliance will be in category A. According to the presentation there are at present 19 such companies and group-wise 13 when the master plan is completed. These companies have till 31 March to present an action plan to the Central Bank, which should be completed by June. Category B will be composed of companies Licensed Finance Companies (LFCs) and Specialised Finance Companies (SFCs) that do not fulfil one or more criteria of Category A. Currently there are 38 such companies. Companies where business is at a standstill and are dealing with litigation or court ordered restructuring will be slotted into Category C. At the moment there is only one such companies, as detailed in the presentation. The consolidation approach will encompass several strategies. One will be for local banks and Category A NBFIs to discuss with Category B companies and identify merger partners and agree terms and conditions for mergers. Such companies will be given until March to identify their choices from Category B. “All Category B NBFIs should merge with local Banks or Category A NBFIs, or merge among themselves, so that they fulfil conditions of the Category A NBFIs. In the event that a Category B NBFI requires a capital infusion by the acquiring bank or Category A NBFI as per a plan that is approved by the Central Bank, a matching support to the acquiring entity, via the Deposit Insurance & Liquidity Support Fund, would be provided,” the presentation noted. The majority of Category B companies should be absorbed by end of 2014 with the rest completed the following year. The local banks and Category A NBFIs would be encouraged to acquire and absorb 1 to 3 Category B NBFIs, meaning that a large company can merge with several smaller finance companies. Increase of core capital by companies up to Rs. 1 billion will be given a time period of two years while boosts to Rs. 1.5 billion have to be completed by 2018. All banks and NBFI have to adhere strictly to the given timeline as well as obtain Central Bank approval for all mergers and acquisitions. The presentation also says foreign banks will be required to submit broad plans outlining greater involvement in the Sri Lankan economy. “If it is observed that any Category B NBFIs may remain unabsorbed after 31 March 2015, the Central Bank may consider such a situation as a possible threat to financial system stability. In such an event, the Central Bank will issue Directions to any banks or NBFIs, directing such institutions to implement and/or undergo a suitable consolidation process, under the provisions of the Monetary Law Act, Banking Act or Finance Business Act,” the road map warned.

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