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Thursday, 17 March 2011

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Government Gazette

Growing confidence in RFCs

Shirley Perera Immediate Past Chairman of the Finance Houses Association Deputy Chairman Central Investments and Finance Ltd

The public of Sri Lanka would be very pleased to hear that all Finance Companies Registered with the Central Bank have come back to normalcy, except for few, after the unfortunate events that took place in the Financial Industry in 2008 and 2009, where perceptions and speculations made panic driven depositors rushing to finance companies to withdraw their deposits.

The situation has now changed drastically and public confidence has improved appreciably and some RFC’s are having excess liquidity situations and offering lower interest rates below the permitted rates by the Central Bank.

Shirly Perera

Even the troubled RFC’s of the Ceylinco Group too are coming back to normalcy and some of the RFC’s were acquired by new investors, which were managed by Managing Agents appointed by the Central Bank.

The recent success of the The Finance (TFC) IPO is an example of the improved public confidence in the RFCs. With the re-structuring of TFC and the appointment of a New Chairman, TFC will regain its loss image.

At a recent meeting their New Chairman said: “We will ensure that TFC will be the best financial institution in this country, by adding value to all its services and regaining investor confidence, as ample funds are in the company, after the recent share issue , which was oversubscribed and there is no need to implement restrictions on repayments”. The company asset base now stands at Rs 26 billion and the new Board is hoping to take all measures to ensure that the company will run as a successful Finance company in the future.

There were few other successful IPOs offered by RFC’s like Sinhaputhra Finance, Singer Finance and Vallible Finance, which were oversubscribed several times, confirming the growing public confidence and stability of the sector.

Central Bank has made it mandatory that all 34 RFC’s are to be listed in the Colombo Stock Exchange before June 2011 and all RFC’s are now in the process of working towards it.

With these new IPO’s, the capital and liquidity position would certainly improve and RFC’s will be able to use these interest free capital funds to expand their business activities and strengthen and broad base their equity funds.

Several other RFC’s like, CIFL are also planning to go for an IPO before June this year, with the listing in the Colombo Stock Exchange.

Usually registered financial institutions including banks take deposits for fixed time periods-assuming that cash inflows by way of deposits are received in the normal pace and withdrawal of such deposits are made on pre-agreed time frame.

However, if all depositors call over at once and request for their deposits, no financial institution in the world will be able to honour such payments, since these deposit funds are invested in different ‘medium and long-term investments.’ When Financial Institutions find it difficult to repay the depositors on call, due to such unexpected liquidity problems, it leads to a panic driven situation, with public confidence being eroded.

Banking and finance are sensitive sectors in the economy and the slightest breach of public confidence will lead to serious repercussions in society. With the loss of public confidence in a financial institution, speculation runs riot, fueling more and more depositors to withdraw their deposits from such Institutions.

The collapse of some of the Banking giants in the United States in the recent past, was mainly attributed to adverse speculation and not merely because they were unstable.

For example if all depositors of Bank of England visit the Bank and request for refund of their deposits, the Bank of England too will not be able to honour such claims, as these deposit funds are invested in long- term investments and loan assets, which would take considerable time to realize fully.

Banks and Registered Finance Companies in Sri Lanka are expected to be closely supervised and monitored by the Central Bank and such close monitoring has been one of the key reasons for many investors to select such Registered Financial institutions to deposit their monies without any reservations.

The Central Bank’s timely intervention in restoring public confidence during the recent crisis by taking various measures to overlook the interest of some affected finance companies was a prudent move, to contain the escalation of the problems.

The shattering of the confidence of the public of the financial system of the country, will normally take a time period, for public confidence to be re-built up, even after reviving such affected companies.

When public confidence is eroded, speculation starts working in vicious cycle and finally ends up in a very difficult situation to change it. Once the public starts to disassociate a particular finance institution, that will lead to its gradual extinction and would finally affect the entire financial industry. It is therefore necessary that such affected financial institutions are revived and public confidence is restored as quickly as possible, avoiding any major collapse.

In this background the restoring the public confidence in the adversely affected companies is commendable and TFC is a good example of rebuilding of public confidence. Most of other finance companies in the Ceylinco Group, which were managed by the Managing Agents are gradually coming back to normalcy.

The only finance company yet to be rehabilitated is Industrial Finance Ltd. The peculiar nature of depositors of this company, is that they are having deposit liability claims of another unregistered company.

We will not be able to segregate the two companies, and measures will have to be taken to settle all deposit liabilities and accrued interest of both companies, with a systematic repayment plan, Despite this unresolved problem of Industrial Finance Ltd, the other RFC’s are performing well, with the growing public confidence in the sector.

The Central Bank is in the process of taking several measures to review this IFL company also.

The latest report issued by RAM Rating Lanka (one of the Rating Companies in Sri Lanka) is very encouraging.

They report that “The RFC’s sector has been gradually recovering from the weakened economic climate that prevailed in 2008 and 2009, due to the confidence crisis triggered by the fall of two unregulated Finance Companies. An extract from this RAM Report is quoted below, as published in the daily papers.

“RFC’s gradually recovering -RAM

As opposed to the previous financial year, FYE 31 March 2010 and the ensuing six months ended September 30, 2010, RFC’s showed an acceleration in loan growth across the industry. Supported by the opportunities of the post-war era and the more favourable macroeconomic conditions. The expansion in the loan base has resulted in the moderation of liquidity and capitalization levels are adequate. Asset quality remains weaker than that of banks, as the sector caters to a high-risk segment; nevertheless, there has been increasing awareness among most RFCs to improve asset quality.

With regard to the latter, lending by RFCs is generally long-term in nature at fixed interest rates, with hire-pur-chase and leases making up 64.73 percent of the industries loan portfolio as at end September 2010.

The broader margins, coupled with loan expansion and lower provisioning charges, have resulted in improving performance.

Going forward, asset quality is expected to improve amid the more favourable economic conditions. In addition, RFCs have taken steps to reduce the incidence of bad loans and rein in bad debts; together with the improving macroeconomic conditions, these steps are expected to aid asset quality improvement.

In line with the improving asset quality and opportunities for RFC’s following the post-war era and the easing of interest rates, performance is expected to ameliorate as well.

“Similarly the Country’s banking industry too has progressed well, during this year and sector will record a positive growth.”

It is an indication that the entire financial sector in Sri Lanka is more resilient and forging ahead in the stable economic and political conditions.

The concept of Colombo being the financial hub will materialize this year and the financial industry would sustain the growth momentum.

The banks are now having the capacity to fund mega development projects, to meet the rapid social-economic development drive, where large scale infrastructure projects are underway.

Therefore the strong growth in banking sector is very important in the present scenario and would stabilize the entire financial sector. The leasing Industry too has fully recovered and heading towards a rapid growth this year and most of the large Leasing Companies are performing extremely well.

It is encouraging to hear that Government has granted capital allowances on equipment leasing, as a budgetary concession for the leasing industry.

The new tax law, which will be effective from April 01, this year, would enable Leasing Companies to lease, not only vehicles but equipment and machinery as well, as the depreciation rates have been changed to 33 percent for 3 years, instead of earlier rate of 12.5 percent for eight years. This will encourage Leasing Companies engaging more in equipment leasing, and help the capital formation in the country. The business opportunities are increasing, as most of the industries are engaging in expansion programs and new ventures, in making use of the peace dividend.

RFC’s have new opportunities now, to diversify their business activities, as RFC’s have been given the permission by the Central Bank for Foreign Exchange money changing to their clients.

RFC’s can now offer specialized services of value additions, by way of exchanging foreign currency, as RFC’s were not considered as “Authorized Dealers”, to deal in foreign exchange in the past.

Recently another rating company Fitch Rating announced that they have upgraded the ratings of several RFC’s.

Fitch affirmed Central Finance company a National long-term rating at A+ (1ka) and also assigned an A(1Ka), rating to CF’s proposed Subordinated Debt Issue of Rs 500 million of five years. They commented that outlook is stable, and CF’s rating factor is relatively good. In December 2010, Fitch affirmed Senkadagala Finance Co. Ltd another RFC, a National long term rating of BBB+(1ka). The outlook is stable and SFC rating reflects long operating history and good capital structure, as well as its relatively good credit control systems and process.

Again in December 2010, Fitch affirmed, Trade Finance Investments Ltd, another RFC, a long term rating of BB+(Ika), as the outlook is stable and the company high capitalization in terms of its size of operations and good profitability.

The rating is somewhat constrained by TFI’s small asset base, limited product diversity, and Narrow funding based, said the Fitch, during the same period, Fitch upgraded the National long term rating of Singer Finance Ltd to BBB+(1Ka).

Conditions in domestic financial markets improved as interest rates have come down with the decline in inflation and the easing of monetary policy. Financial markets also became more liquid largely due to an increase in capital inflows.

 

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