CBSL to stabilize nonbanking financial sector | Daily News


CBSL to stabilize nonbanking financial sector

The Central Bank of Sri Lanka (CBSL) expects to further reinforce the stabilisation of the nonbank deposit taking financial institutions sector with proposed changes to the Finance Business Act (FBA).

Also CBSL proposes to issue Directions on ownership limits for Licensed Finance Companies (LFCs), giving a reasonable time horizon for the implementation, with flexibility on ownership limits for investors who invest in distressed companies expecting to restructure such companies.

“Meanwhile, voluntary consolidation among LFCs will be encouraged in order to meet the minimum capital requirements,” the Governor of the Central Bank Governor Prof. W.D Lakshman told the launching ceremony of CBSL’S road map for 2020 yesterday (06).

Also, in future, he said CBSL will disclose the names of LFCs subject to regulatory concerns.

Key priorities for the medium term in respect of non bank financial institutions sector include strengthening the existing regulatory framework in line with current market developments and international best practice, establishing resilient and well performing LFCs, resolution of existing distressed and high risk companies, and initiating legal action against wrongdoers. In addition, CBSL is in the process of drafting a comprehensive Resolution Framework to cover all financial institutions supervised by the Central Bank.

Speaking further on nonbank deposit taking financial institutions, he said sluggish performance of Licensed Finance Companies (LFCs) and Specialised Leasing Companies (SLCs) continued in 2019. He noted that negative credit growth, declining profitability and an increase in non -performing loans are seen as some of the sector characteristics.

Subdued economic growth and commercial activities impacted by the Easter Sunday attacks and political instability ahead of the presidential election mainly contributed to this dismal performance.

On the policy front, CBSL has issued various directions to the nonbank financial institutions sector in line with government policies which were aimed at reviving economic growth.

“We issued directions to Licensed Microfinance Companies (LMFC), on ‘Maximum Rate of Interest on Microfinance Loans’ with the objective of protecting customers from exorbitant interest rates and on ‘Deposits’ to restrict LMFCs from accepting deposits other than collateral deposits.”

He said further that a similar Direction was issued to LFCs on ‘Maximum Interest Rates on Deposits and Debt Instruments’ to enhance credit flows to the real economy.

A Finance Business Regulation was also issued with a view to providing guidance in prioritising claims in winding up of a finance company.

The Loan to Value (LTV) Direction was revised according to Budget 2019. Also, a circular was issued on ‘Concessions granted to Tourism Industry’ requiring LFCs and SLCs to grant concessions to individuals and entities in the tourism industry, who wish to avail such concessions.

Further, a consultation paper was issued to introduce ownership limits to LFCs to strengthen corporate governance and internal controls. In addition, the first draft of the Credit Regulatory Authority Bill to regulate and supervise money lending and microfinance business was finalised jointly with the Ministry of Finance and made available to stakeholders for comments.

During 2019, the Central Bank continued to take action on distressed and high risk LFCs. These included cancellation of licenses and appointment of management panels, in order to safeguard depositors. Regulatory actions were initiated against the wrongdoers to recover losses they caused to companies and repayment of deposits of two distressed finance companies was facilitated.

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