RAM Ratings report on RFCs

Registered finance companies (“RFCs”) represent an important component of Sri Lanka’s financial landscape.

Although this sector only constituted 3.7 per cent of the entire financial system’s assets as at end-December 2008, RFCs, together with their branches - are crucial to the development of small, medium-sized and even micro enterprises, said the RFC sector report issued by the RAM Ratings Lanka.

While RFCs are primarily engaged in vehicle financing, this industry supports the financial requirements of small and medium-sized enterprises (“SMEs”) through other forms of asset-backed financing.

In addition, there is also a segment of the industry that deals in real-estate development and housing. These loans and other assets are in turn funded through public deposits. To ensure that RFCs undertake their business activities in a prudent manner, they are regulated by the Non-Bank Financial Institutions Department of the Central Bank of Sri Lanka.

The much-publicised collapse of two finance companies in 2008 had focused the spotlight on deposit-taking financial institutions. As the public rapidly lost confidence in the financial system, many depositors scrambled to safeguard their money amid rumours of lengthy queues at many deposit-taking institutions. As a result of sudden and substantial withdrawals, many of these entities faced liquidity pressures while the segment which was hit hardest was the RFC sector. However, well-rated and/or prudently managed RFCs had been able to withstand the pressures better than others. The timely intervention of the Central Bank and a spate of ownership and/or stewardship changes have helped stabilise the industry, the report said.

The deposit withdrawals and the resultant liquidity crunch, combined with legal action against failed finance-company directors, have propelled the principles of risk management, corporate governance and transparency to new heights. In this regard, the Central Bank has already directed industry players to strengthen their corporate-governance practices.

The regulator has proposed other guidelines to improve the industry’s disclosure practices. RAM Ratings Lanka opines that players that embrace the trinity of risk, governance and transparency will thrive amid the evolving RFC landscape.