Fi­nance com­pa­nies...

Daily Mirror (Sri Lanka) - - LIFE -

Fur­ther, the fi­nance com­pa­nies with as­sets over Rs.100 bil­lion – termed as sys­tem­at­i­cally-im­por­tant li­censed fi­nance com­pa­nies – will be re­quired to build an ad­di­tional cap­i­tal sur­charge of 150 ba­sis points start­ing from July 1, 2019 to July 1, 2021.

This ef­fec­tively takes the to­tal cap­i­tal ra­tio up to 14 per­cent by 2021 for such larger fi­nance com­pa­nies.

How­ever, the most im­me­di­ate hur­dle for all fi­nance com­pa­nies will be to up their tier I ra­tio to 6.0 per­cent by next month.

“New cap­i­tal-ad­e­quacy reg­u­la­tions for Sri Lankan fi­nance com­pa­nies are likely to im­prove the re­silience of the sec­tor to eco­nomic shocks, but will add to cap­i­tal­iza­tion pres­sures— par­tic­u­larly for the coun­try’s nu­mer­ous small-scale fi­nance com­pa­nies,” Fitch Rat­ing said.

Fitch noted the fi­nance com­pa­nies that they rate al­ready stay on top of the cap­i­tal thresh­olds com­ing into ef­fect next month even af­ter tak­ing into ac­count the po­ten­tial risk-weighted as­set changes based on the cur­rent as­set mix.

While most of them al­ready com­ply with the 2021 thresh­olds with some re­quir­ing ex­ter­nal cap­i­tal to stay in line, the rat­ing agency said the small fi­nance com­pa­nies are strug­gling to raise cap­i­tal to com­ply with an ear­lier re­quire­ment, which asked them to hold a min­i­mum core cap­i­tal of Rs. 2.5 bil­lion by Jan­uary 1, 2021.

“The new min­i­mum cap­i­tal ra­tios are likely to add to those dif­fi­cul­ties”, Fitch said.

Sri Lanka’s li­censed fi­nance com­pany sec­tor has long been sub­jected to less strin­gent checks and bal­ances com­pared to the banks on their cap­i­tal ad­e­quacy, mea­sure­ment of risks and dis­clo­sure re­quire­ments.

The lax reg­u­la­tory frame­work on the sec­tor re­sulted in many fi­nance com­pa­nies fil­ing for bank­ruptcy due to mis­man­age­ment of funds with the tax­pay­ers hav­ing to res­cue the hap­less de­pos­i­tors.

Mean­while, cap­i­tal ra­tios of the fi­nance com­pa­nies will come un­der down­ward pres­sure due to sub­stan­tial in­crease in risk weighted as­sets/loans in the sec­tor stem­ming from ad­di­tional risk weight­ing made on ‘op­er­a­tional risks’ and the changes in the com­pu­ta­tion of risks weighted as­sets for credit risk.

There­fore Fitch said those fi­nance com­pa­nies ex­posed to un­col­lat­er­al­ized lend­ing such as mi­cro­fi­nanc­ing, “may see the sharpest in­creases in RWAS, as this lend­ing will be risk-weighted at 125 per­cent in­stead of 100 per­cent as pre­vi­ously”.

How­ever, the sec­tor does not con­sider the ‘mar­ket risk’ in their trad­ing book when com­put­ing the risk weighted as­sets in a fi­nance com­pany’s bal­ance sheet be­cause the reg­u­la­tor still views such a risk is low in the sec­tor.

The stag­gered cap­i­tal ra­tio in­cre­ments for the li­censed fi­nance sec­tor in Sri Lanka is com­ing into ef­fect pre­cisely one year af­ter the coun­try’s bank­ing sec­tor was made sub­jected to BASEL III reg­u­la­tions on cap­i­tal re­quire­ments.

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