NBFI sector consolidation ‘credit positive’: Moody’s
Sri Lanka’s move to consolidate the non-bank financial institutions is ‘credit positive’, international rating agency Moody’s said in a recent report.
In keeping with one of its two main responsibilities— ensuring the financial system stability— the Central Bank a couple of weeks back presented a master plan to consolidate Sri Lanka’s over-expanded banking and non-bank sectors.
Under this, the Central Bank expects to shrink the non-bank financial institution (NBFI) sector comprising 47 licenced finance companies and 11 spe- cialized leasing companies to 20 large companies from the current 58 through mergers and business absorptions.
“A smaller number of NBFIs will reduce inefficiencies in the financial system and make the remaining institutions stronger, owing to greater economies of scale and business diversification,” Moody’s said.
The rating agency further said that it expected the largest finance companies, such as People’s Leasing & Finance, Central Finance, LB Finance and Lanka Orix Finance, which collectively hold 39 per- cent of all NBFI assets, to survive and augment themselves in the consolidation process.
When considering the high degree of interconnectedness that already exists among NBFIs and banks, which the Central Bank did not necessarily address with these measures, making individual institutions stronger will at least reduce the risk of a failure triggering contagion,” Moody’s noted.
The interconnectedness of NBFIs was highlighted in 2009 when eight NBFIs faced liquidity problems because of the collapse of a related com- pany.
The Central Bank has classified the existing 58 NBFIs into three categories based on three factors—asset base, core capital and compliance with the Central Bank directives.
About 19 individual NBFIs with more than Rs.8 billion asset base, over Rs.1 billion core capital and high degree of compliance with the Central Bank directives were classified under Category A and NBFIs which don’t fulfil one or more of the above criteria of Category A have been identified under Category B.
One NBFI currently at a standstill due to a stay order issued by the Court of Appeal, in respect of a restructuring plan, has been identified under Category C.
According to the Central Bank, local banks and Category A NBFIs will be encouraged to acquire and absorb one to three of Category B companies.
After the consolidation process is complete, each NBFI will be required to have a minimum asset size of Rs.20 billion, with which currently 10 NBFIs are able to comply. In addition, each corporate group operating multiple NBFIs must consolidate them by June.