Based on Capital Adequacy Ratios: Mid - 2022 Ultimatum for Finance Companies
By Ishara Gamage
Sri Lanka’s financial sector regulator Central Bank of Sri Lanka (CBSL) is planning to protect the credibility of the non-bank financial sector while ensuring the nation’s financial system stability by tightening sector capital adequacy based regulations from mid-2022, a top CBSL official told Ceylon FT.
“Under this proposed regulatory guidelines We (CBSL) are considering giving strict mid-2022 ultimatums to all Sri Lankan licensed finance companies (LFC) and registered finance leasing establishments to fulfil its minimum capital adequacy requirements,” he said.
Accordingly, if there are companies that are unable to meet those requirements by the relevant time, they will have to merge with the powerful companies or if they do not, they will have to close down, the spokesman said.
According to his knowledge, the CBSL’s non-banking sector supervisory department has already submitted the sector restructuring master plan to CBSL’s monetary board (MB) and the MB has now referred it to special CBSL internal committee under deputy governor K.M.M. Siriwardana for further evaluation.
“This internal committee will submit its final observation shortly to MB subject to stakeholder concessions,” an official revealed.
Therefore, upon the MB’s approval, the CBSL plans to present it to industry participants for comprehensive stakeholder approval to the proposed master plan. However, officials said in the future, the existing regulations on whether all finance companies must be listed on the Colombo Stock Exchange (CSE) or not will be considered on a case-by-case basis in accordance with the CSE regulatory requirements.
Currently, the CBSL has set a minimum capital adequacy ratio of 12.5 per cent for companies with less than Rs 100 billion asset base and 14 per cent for companies with more.
He said that the new regulations will be introduced subject to a minimum probation period of one-and-a-half years, beginning 1 January 2021. Accordingly, the CBSL is expecting that the total number of companies representing the non-banking financial sector with 41 finance companies and leasing companies (currently three) will drop to 25 within the next two or two-and-a-half years.
The non-banking financial sector is currently lagging behind due to the Easter Sunday bombings, the recent COVID -19 epidemic and the slowdown in the economy over the years. Rating giant Fitch ratings Lanka expects the non-banking sector to face multiple challenges in the near team, including muted loan growth, margin compression amid lower interest rates, and rising loan-impairment charges due to asset-quality pressures.
There is an over Rs 1.4 trillion-worth loan portfolio in the Sri Lankan finance company sector and out of that, 14 per cent or over Rs 460 billion worth of loans presently categorised as non-performing loans (NPLs). It was 10 per cent at end 2019.
However, CBSL said the bigger finance companies’ NPL ratio is at the six per cent level.
The sector represents approximately 8.0 per cent of assets of the Sri Lankan financial system. There were at least six to eight LFCs yet to fulfil the Rs 1.5 billion minimum capital requirement imposed by the CBSL on 1 January 2020; however, CBSL later postponed these mandatory requirements, mainly due to the effects of the prevailing pandemic.
The CBSL recently launched a liquidity support scheme worth Rs 20 billion for Sri Lanka's cash-strapped non-banking sector.
“We have already allocated Rs 20 billion from our Deposit Insurance and Liquidity Support Fund to launch this scheme,” the official said. The Finance Houses Association of Sri Lanka (FHA) – the apex body of 41 finance companies registered with the CBSL – recently welcomed the CBSL’s attempts to consolidate the sector and stated that such decisions are vital to the stability of the country’s financial system.
Speaking to Ceylon FT, an official stated that CBSL’s proposed decision was timely and will build a vibrant and trustworthy non-banking sector in Sri Lanka.
“Stronger entities can survive without any merges with this proposed decision, but weaker ones must find partners or otherwise obey the regulator, CBSL’s, directions,” he predicted.