New laws to expand leasing business

Channa Kasturisinghe

LEGISLATION: The proposed amendments to the existing finance leasing regulations are expected to enable strongly capitalised leasing companies to broaden their funding sources and to expand their operations.

The Governor of the Central Bank Ajith Nivard Cabraal said recently that the new laws under the Finance Leasing Act would allow leasing companies to mobilise funds from the public through the issue of debt instruments.

The amendments will be introduced following a request made by specialised leasing companies to consider the definition given in the Banking Act to `Deposits' which also covers mobilisation of funds obtained through the issuance of debt instruments as a business.

However, the Central Bank considers it is vital to have more prudential norms to safeguard the interests of investors if leasing companies are permitted to mobilise funds from the public.

According to the Financial System Stability Review 2006 the Central Bank has issued eight directions to leasing companies relating to minimum capital, provision for bad and doubtful accommodation, single borrower limit, gearing ratio, accrued interest, reserve fund, financial statements and corporate and operational information.

Following a recommendation made in the Budget 2003, a requirement has been imposed on specialised leasing companies to obtain ratings for debt instruments issued by them to the public and which are not guaranteed by a rated financial institution and each of which exceeds Rs. 100 million.

This limit was subsequently increased to Rs. 200 million.

The Governor of the Central Bank also said that the regulatory framework of registered leasing establishments will be strengthened by carrying on comprehensive on-site examinations of selected leasing establishments and spot examinations of the others on a regular basis.

Leasing has become an attractive business due to the availability of tax benefits and the convenience associated with lease finance.

The total value of leasing facilities granted by registered finance leasing establishments was Rs. 114 billion as at end June 2006. According to the Central Bank almost all the leasing companies operated profitably during the first half of 2006.

However, the Central Bank has observed that the concentration on vehicle financing by leasing service providers has been singnificantly high and has accounted for more than 75 percent of the total leasing facilities of the seven largest registered finance companies and the nine largest specialised leasing companies.

The Central Bank meanwhile said that the facilities granted in respect of leasing showed a declining trend in the recent past and accounted for 64 percent of the total portfolio of all specialised leasing companies as at June 2006.

In contrast, faicilities granted by way of hire purchase by them increased and amounted to 19 percent of the total accommodations during this period.