- Complain of unfair treatment; industry holds Rs. 1.3 t in assets, 7 m customers, Rs. 758 b in deposits
- Says NBFIs champion financial inclusion, cater to higher-risk informal sector comprising 50% of population
- Rejects accusations of insensitivity, 500,000 moratoriums given to counter COVID-19 impact
- Backs updating Moneylending Ordinance, new Microfinance Act, better grievance resolution, Finance Ombudsmen
- Willing to work with CB as regulator, supports macro-prudential measures supporting sector
Non-Bank Financial Institutions (NBFIs) yesterday said they were
being unfairly maligned, and called for wide ranging legal and
regulatory reforms for the industry, including institutional
consolidation, a special investigation unit to minimise unregistered
companies, provincial financial ombudsmen, and macro-prudential policies
more suited for the sector.
The Finance Houses Association (FHA), which is made up of all registered
finance companies, pointed out they served a critical role in bridging
the gap between the informal sector and the overall financial system.
NBFIs in Sri Lanka account for Rs. 1.3 trillion in assets as of 2019,
and served an estimated 7 million customers. Of these people, more than
60% were borrowers, while the remainder were depositors. The 3 million
odd depositors collectively accounted for Rs. 758 billion in deposits.
NBFIs also employ more than 32,000 people. The sector had posted 20% odd
growth consistently over the past few years, and operated twice as many
branches outside the Western Province. As much as 85% of the business
is held by 16 larger players, with the rest of the 39 registered
companies vying for business in a much smaller space.
FHA officials emphasised that the industry primarily catered to people
that conventional commercial banks would not cater to because they were
high risk and had no credit history. They insisted were it not for the
NBFIs, many segments in the economy would struggle, and productivity as
well as economic growth would be badly hit as a result. Industry
representatives said that over 500,000 moratoriums had been voluntarily
granted by them to ease the impact of COVID-19 on customers, as well as
suspended repossessions and extended payments. The industry also pays
approximately Rs. 16 billion in taxes to the Government per annum.
“Despite doing all this, our industry is often criticised and unfairly
maligned. We cover the bottom of the pyramid, which is at least 50% of
the total population. What we do directly impacts people’s lives. NBFIs
are responsible for 93% of three-wheel leases, 75% of tractors and other
farm equipment, 70% of lorries, and the same of light vehicle leases.
Most months more than 55% of credit reports requested from the CRIB come
from finance companies, which shows that we lend more than banks,” FHA
Immediate Past Chairman Krishan Thilakarathne said.
“However, the public must understand that because we lend to high-risk
people, our cost of funds and overheads are higher, this could lead to
higher interest rates but not all the time. Our main source of funds are
our depositors, and since most of them expect a slightly higher
interest than what is given by banks, we have to earn enough to pay them
as well. There are plenty of customers who have started businesses with
us and done very well. But these stories aren’t told.”
The FHA acknowledged there were multiple issues within the sector, and
said they were willing to work with the Central Bank as the regulator to
resolve key outstanding problems. The FHA called on authorities to
update the Moneylending Ordinance and enact a new Microfinance Act that
would close existing loopholes. Among the other recommendations were:
stopping the unlawful transfer of leased assets to third parties; an
alignment of accounting policy standards, legal and regulatory
frameworks; a better grievance handling process; using services of the
Financial Ombudsman; and establishing ombudsmen services regionally.
The association also backed the creation of a special investigation unit
to identify and close down unregistered finance companies, and set up
policies that would enable a range of registered finance companies to
operate in the market.
“Macro-prudential policies need to be made understanding the unique
operating space of NBFIs. There has been a lack of focus on monetary
tools applicable to the NBFIs, and policymakers need to ensure that the
repayment culture at the bottom of the pyramid is not disrupted by their
decisions. It would also be positive to relax the Statutory Reserve
Ratios (SRR) and Liquidity Reserve Ratio (LRR) for NBFIs, and enable
them to access low-cost funding channels, provide credit support, and
help them find funds to meet specific economic objectives,” FHA Council
member Niroshan Udage said.
The FHA also said they are in agreement with the findings of a committee
appointed by the Central Bank last month to identify the issues and
challenges within the leasing industry. The report called for amendment
of the Finance Leasing Act, and fast-tracking repossession cases in
court as part of its short- and long-term recommendations.
Photo Caption
- From left: FHA Legal Advisor Shiranthi Gunawardena, FHA Immediate Past Chairman Krishan Thilakaratne, FHA Chairman R.H. Abeygoonewardena, FHA Council Members Niroshan Udage and Sanjeewa Bandaranayake