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.
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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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