Jan 10, 2017

Sri Lanka finance companies struggle to raise co-capital

Sri Lanka’s registered finance and leasing companies have been pushed into difficulties with the introduction of new reforms by the Central Bank, directors of these financial institutions warned.

They said that they are currently in discussions with prospective local and foreign investors to enhance their capital in line with proposed Central Bank requirements.

A director of a leading finance company noted that their shareholders were not in favour of increasing the co capital as the companies are not making profits and its deposit base is gradually eroding owing to the diminishing of depositor’s confidence on Central Banks in consistent policies such as restrictions placed on branch expansions.

How can you increase the capital without any expansion in the non banking financial sector which is restricted to even open new branches, he said adding that raising of funds, by way of equity would be subject to the approvals of the Central Bank, Exchange Control Department, SEC, CSE and shareholders.

The shareholders have already expressed their protest against the increasing of capital threatening to withdraw their shares, he said.

The capital levels of licensed finance companies (LFCs) and specialised leasing companies (SLCs) are expected to be strengthened further. Accordingly, existing LFCs and SLCs will be required to maintain a higher minimum core capital than the prevailing requirement of Rs. 400 million and Rs. 300 million, respectively. These will be increased to Rs. 2 billion and Rs. 1 billion, respectively on a staggered basis to facilitate the smooth transition.

This Road Map proposal of the Central Bank is unrealistic as it has done a poor job of managing the LFC and SLC segment. As a result depositors have faced difficulties getting their funds following a failure and therefore fit and proper rules need to be properly applied, he pointed out.

If the previous plan had been carried out, the number of these institutions would have been greatly reduced.

The goal was to have a total of 20 institutions, down from the 56, three of which were to be focused on microfinance. An estimated 90% of the segment’s assets are held by 20 companies, according to the central bank. Each institution would have been required to have more than Rs.20bn ($144m) in assets, he claimed.

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