Lack of good governance
*No new licenses to be issued, consolidation option for weaker players
December 4, 2012, 12:00 pm
By Ravi Ladduwahetty
Central Bank Governor Ajith Nivard Cabraal says the growth of the country’s non-bank financial institutions (NBFI) sector was hampered by a lack of professionalism, accountability, transparency and corporate governance.
"There is a need to take the NBFI sector forward but the principal drawbacks which kept the sector from moving forward were the lack of professionalism, accountability, transparency and corporate governance. There is also a need for a dynamic infusion of human resources capital in the non banking sector which was also the crying need of the moment," he noted.
Cabraal also advocated that corporate governance also to be at the forefront which would ensure fitness and propriety of the Board members and the senior management and ensure the clear demarcation on involvement of the board and the senior management in the affairs of the NBFIs, achieve oversight through dedicated board sub committees and ensure that there is arms-length dealings in related parties and ensure transparency in all disclosures.
He also advocated that all NBFIs should ensure the implementation of robust financial controls, deploy strong compliance frameworks, establishing internal control mechanisms to ensure reliability of financial statements, achieve board oversight through independent internal audit function and safeguard independent external audit mechanism.
The Governor, while saying that the Central Bank Monetary Board would not be issuing licenses for the next two years for Specialised Leasing Companies, advised them to perform or face the prospect of being "gobbled up" by the bigger players of the market, alluding to consolidation of the weaker players in the market with the strong.
Cabraal yesterday implored the Directors of Non Banking financial Institutions (NBFIs) to access foreign capital and also to raise their ratings, which he said, would, assist Sri Lanka in emerging as a US$ 4000 per capita income economy.
Addressing the Directors’ symposium for Non Banking Financial Institutions (NBFI) themed ‘Positioning the Non Banking Financial Sector for the US$ 4K Era’ at the Galadari Hotel yesterday, he said that the Licensed Finance Companies (LFCs) and Specialised Leasing Companies (SLC) will need to facilitate private sector investments in order for the country to reach the US$ 4,000 per capita income mark. "The NBFI sector needs to access foreign funds and internationalize the sector, tap international sources with significant foreign exchange inflows for various projects and raise standards to go global."
The governor also noted that the NBFI sector needed reshaping with the national economy envisaging to move to the next growth phase of US$ 4000 per capita where the rising income levels have resulted in the society moving to the next level of standard of living where competition is expected to intensify significantly where new regulatory reforms, changing cost structures and risk management and IT advancements in mobile banking were also the order of the day.
The governor also said that the traditional leasing business will no longer be the key business and that the NBFIs needed to drastically amend their hitherto firmly entrenched practices which needed to be changed to a deeply rooted business model, concentrating ion collateralized lending businesses based on immovable assets offering vanilla products such as finance leasing and hire purchases and pawning along with catering to specific segments of the population.
The performance of the sector also received the commendation of the governor when he said that they were vibrant and resilient, accounting for 6% of the financial system. He also explained that the total of 46 Licensed Finance Companies and 13 Specialised Leasing Companies , accounted for a total asset base of Rs. 564 billion, a consolidated lending portfolio of Rs. 451 billion which have been buttressed with 833 branches.
These financial institutions provide the financial services to segments which have not been able to meet the requirements so the banking sector and which have contributed to the overall financial stability of the banking sector.
He also said that the year on year growth has been healthy with the asset growth of the NBFI sector growing from the Rs. 188.2 billion as at September 30,2009, Rs. 351 billion as of the same date on 2010, Rs. 356 million in 2011 and Rs. 451 billion in 2012.
The asset growth of the NBFI sector growing from the Rs. 188.2 billion as at September 30,2009, Rs. 351 billion as of the same date on 2010, Rs. 356 million in 2011 and Rs. 451 billion in 2012.
The total deposit growth of the NBFI sector has increased from the Rs. 113 billion as at September 30,2008, Rs. 138 billion as of the same date on 2009, Rs.181 billion in 2010 and Rs. 233 billion in 2011
He also implored the creation of diversified business models ranging from the introduction of diversified business products, creation of business models on the basis of "one-stop" shops and focusing in sectors such as construction, tourism, manufacturing, services and agriculture. He also said that the risks of the sector could also be assessed from potential risks, mechanism of management information and reporting to identify and monitor such risks and the responsibility and understanding of risks and managing such risks appropriately to be managed by the Board of Directors.