by Azhar Razak Courtesy The Island

Analysts question fate of Central Bank’s compulsory listing requirement plan for registered finance firms

December 17, 2016, 6:22 pm

Of the 46 licensed financial companies in Sri Lanka, 15 are presently facing liquidity issues, with six at a high level of distress with Non Performing Loans ranging from 50 to 90 percent, the International Monetary Fund (IMF) revealed in a recent report.

Releasing the much-awaited Staff Report prepared by a staff team of the IMF and completed on November 4, 2016, the IMF notes that in addition to the mismanagement and irregular practices, the rapid growth of the non-bank financial sector in Sri Lanka has often led to excessive risk taking which has led to the deterioration of the financial position of these companies.

However, the IMF said the cost of resolution is expected to be minimal as the total assets of the distressed companies are about 1 percent of GDP

“Neither the Central Bank nor the Finance Ministry has so far shed light on the names of these finance companies in trouble perhaps with the opinion that naming them might worsen the issue and lead to a run on these companies, a top financial sector analyst told The Sunday Island on the condition of anonymity.

However, the pertinent question to be asked right now is whether or not public be made more aware of the troubled licensed finance companies given the fact that 12 out of the 46 are still not listed and hence their financial statements are not readily available, he hoted.

Pointing out that while a mandated listing itself would not however guarantee credibility to the firms in question, the analyst noted that the silence of the authorities in pronouncing a clear policy direction with

regard to the compulsory listing requirement for registered finance companies introduced by the previous administration, is a concern.

“The new Central Bank administration announced it had scrapped the consolidation plan adopted by the former administration. But it is not yet clear whether the plan for a compulsory listing requirement is in place or not,” the analyst said.

According to the IMF report, the authorities are preparing a resolution plan of the15 distressed non-bank finance companies using a special purpose vehicle, and CBSL’s Monetary Board approved in mid-October a resolution mechanism for the repayment to depositors of 4 insolvent non-bank financial institutions. The authorities had earlier announced actions are being taken by the government and the CBSL to restructure them through establishment of a Financial Asset Management Company (FAMA).

The Central Bank in a press release issued in October said that the regulation and supervision by the Bank do not mean a guarantee for each and every deposit and investment made by the public in banks and financial institutions. It noted that the responsibility of the Central Bank is only to provide an external safeguard through regulation and supervision to the extent permitted in law while facilitating institutions to carry on their businesses essential for the economy and general public in a safe and sound manner in a stable financial system.

“Those who make such deposits and investments and those who undertake businesses based on these funds are primarily responsible for their business decisions regarding prudent management of their funds”, it said.

In fact, almost all funds placed in the above distressed companies have been mobilized through unauthorized financial products. Even large depositors and investors have been negligent in not undertaking the normal due diligence on risks and return, despite being sufficiently knowledgeable and skillful to do so,” the regulator said in a statement announcing the resolution of four insolvent financial institutions “to protect depositors and promote the financial system stability”.

It has to be noted that the Central Bank has however mandated all Registered Finance Companies (and licensed commercial banks, both local and foreign) in Sri Lanka to publish their summarised financial statements each quarter in a national newspaper.

“This disclosure will however only be noted by the most alert of persons as only a very few would read/buy all relevant newspapers in any case and the average person would be unaware of the financials of unlisted financial companies and banks,” another analyst who also did not wish to be quoted argued.

The analyst further pointed out that the Central Bank should arguably make arrangements to host financials of non-listed finance companies and banks on its own website.

The 12 finance companies not listed on the Colombo Stock Exchange but operating at present are City Finance Corporation Ltd, ETI Finance Ltd., HNB Grameen Finance Ltd., Ideal Finance Ltd., Kanrich Finance Ltd, Melsta Regal Finance Ltd, Richard Pieris Finance Ltd., Sarvodaya Development Finance Co. Ltd., Serandib Finance Ltd., (formerly Indra Finance), The Standard Credit Finance Ltd., TKS Finance Ltd., and U. B. Finance Co. Ltd.

It has to be, however, understood that the 15 finance companies which the IMF has indicated to be suffering from liquidity issues could be both a mix of listed and unlisted firms as a listing will only give the much-needed transparency for the public with regard to the health of individual finance companies.

“Being listed is in itself not a guarantee that a finance company is doing well. It only means that the particular firm is more transparent as it is bound by Stock Exchange rules and regulated by the Securities and Exchange Commission,” the analysts explained.

Of the 12, the management of HNB Grameen has indicated intent to list in the near term, while Richard Pieris Finance is in the process of amalgamating with 90% owned and listed Chilaw Finance (CFL) where the surviving entity may get listed.

Sarvodaya Development Finance controls 76% of listed Summit Finance (GSF) while Serandib Finance was fully acquired by Commercial Bank (COMB). There have also been many reports in the past regarding plans to list U B Finance, analysts said.