Central Bank hits back on 'unfair' Finance Co. mishandling claims

Sri Lanka's embattled Central Bank this week hit back, in big way, against critics who claim the body has mishandled issues pertaining to the local Non-Bank Financial Institution (NBFI) sector, resulting in a string of high profile (near) collapses with the most recent being the ongoing crisis at CIFL, a finance company registered under the country's Finance Business Act No. 42 of 2011 (FBA).

Taking out strongly worded full-page notices to the public in at least two local daily newspapers, the regulator kicked off its defense by stating: "Over the past 7 years, not a single finance company has collapsed, and consequently had to be liquidated. Although there have been some finance companies that have encountered stresses, whenever that has happened, those companies have been restructured in a gradual manner to regain financial strength. In contrast, in the most advanced markets, banks and [NBFIs] have faced immense difficulties, and sometimes collapsed in the hundreds in recent times! Even in Sri Lanka, in the late 80s and early 90s, 13 financial companies collapsed, and some are yet under liquidation".

The Central Bank argues instead that the NBFI sector has actually grown, supporting these claims by laying out the regulator’s own track record: "During the last few years, the Central Bank has taken a series of measures to strengthen the regulatory mechanism to ensure soundness of the [NBFIs] and safeguard the funds of the depositors. These include the enactment of the Finance Business Act, increasing minimum core capital, introduction of corporate governance and assessment of fitness and propriety of executives, and listing in the Colombo Stock Exchange. As a result of all these measures, Sri Lanka today enjoys a substantially strong financial sector. Further, during the past 7 years, the assets in Bank and the NBFI sectors have grown almost 200 per cent, from Rs. 1,908 billion as at December 31, 2005, to Rs. 5,698 billion by December 31, 2012".

Labelling the claims made by critics as "unfair", the body also went on to add: "That reasoning indicates an absolute ignorance of the financial sector, or a deliberate misunderstanding of the situation". Continuing on, the regulator further commented that, "if an unbiased view is taken, it would be possible to see that an enormous improvement has taken place in the Sri Lankan banks and NBFI sectors and the credit for such improvement should go to a large extent, to the Central Bank, which has introduced timely action, proper norms, sound supervisory measures, good governance procedures, necessary directives in times of buildup of weaknesses, and the required legal framework to deal with errant officials and companies".

Speaking on the issue of regulating of financial companies already registered under the FBA, the Central Bank was of the view that its responsibilities did not include a "blanket guarantee that every institution in the NBFI sector would meet its obligations, in every circumstance. Nowhere in the world is such a guarantee given. When framing the laws, the Sri Lankan Parliament too, has never contemplated a blanket guarantee to be given by the Central Bank".

Commenting further, the body also reiterated an oft-stated opinion. "Central Bank does not guarantee deposits of Finance Companies [which has] been clearly laid down and given wide publicity. In fact, in the Central Bank’s media campaigns, unambiguous notice has been given to all would-be depositors that: 'The Central Bank is authorized to regulate and supervise the named institutions in order to promote prudence in their business operations and thereby safeguard the deposits of the public. However, the Central Bank does not have legal authority to guarantee deposits or assure that any such institution will never fail...When depositing money in any of the named institutions, please exercise due care for the safety of your deposits'".

At the same time, the regulator also signalled the potential culpability of depositors themselves, stating: "Unfortunately, in some instances, depositors have contributed to liquidity constraints and distress situations faced by some NBFIs, by accepting higher interest rates for deposits, than the ceiling that has been imposed by the Central Bank to the NBFIs. As consistently maintained by the Central Bank, prior to investing, depositors should evaluate the risks of the investment by considering the financial statements of the relevant company, ratings assigned to it by reputed rating agencies, etc. If the depositors and other stakeholders of the licensed finance companies expect that the regulator will prevent the NBFIs from losses and collapse under any circumstances, it is an obvious misconception that will also create an unacceptable moral hazard for society, as well.

In that background, people who blame the regulatory authority whenever there is a loss obviously do not understand that regulation does not mean a blanket guarantee. At the same time, it must also be stated that there are many NBFI’s that are managed well in conformity to the laws and directions of the Central Bank, and these continue to perform well giving satisfactory returns to all its stakeholders, including depositors".

Responding specifically to the CIFL crisis, and in particular to some populist views that the Central Bank should take it upon itself to repay depositors, the regulator stated: "CIFL has faced these problems mainly due to its own mismanagement, and therefore, the liquidity problem of CIFL will not affect the NBFI sector as a whole. In the case of CIFL, most of members of the Board of Directors and members in senior management were very experienced, while also being academically and professionally qualified.

Unfortunately however, the Board of Directors and Senior Management who are responsible to safeguard depositors’ money did not discharge their responsibilities properly, and consequently the Central Bank was compelled to appoint a managing agent. Such managing agent has already engaged the services of an Audit firm to conduct a forensic audit to find out the reasons for the distress. It is likely that once those investigations are completed, a clear picture will emerge as to the reason of the current debacle in the company".

Also added; "At the same time, the general public is also mature enough to understand that a difficulty in a single company does not mean that the entire sector is suffering from the same situation. They are also aware of the action taken by the Central Bank in the past to deal with such situations.

Further, it must be reiterated that CIFL has not collapsed as claimed by some, and it is being restructured. It is also likely that if the CIFL diligently follows the path that would be prescribed by the Central Bank upon the advice of the managing agent, it could be nursed back to health".

The body also continued on to note that CIFL has "now entered a process of restructuring in a similar manner that a few other registered finance companies underwent restructuring, in the aftermath of the Golden Key crisis. It must also be remembered that such a restructuring can only be done because CIFL is a registered NBFI, which provides the legal authority to the Central Bank to intervene in times of distress".

As to its ability to punish those that are found culpable, the Central Bank noted that the "present laws provide teeth to prosecute wrong doers, and the Central Bank is determined to take the necessary measures to recover whatever funds that have been siphoned off, from the errant directors and officials, as well as take the necessary action under the law to deal with the persons responsible.

In fact, the FBA stipulates certain offences, which prescribe jail sentences and fines to officials of NBFIs who have been errant or have misappropriated funds. In the past 7 years, not a single NBFI has actually failed, but some have experienced stresses and had to be nursed back to good health. However, at present, there are certain directors and others who are suspected of wrongdoing, against whom evidence is being accumulated and investigations are being conducted. If the evidence suggests their complicity in offences that would warrant jail sentences, the law would prevail and the necessary legal action would be taken, so that the penalties imposed by the law could be meted out for those who are found guilty".

Concluding, the Central Bank also opined "certain political elements are attempting to use the CIFL issue to try and frighten the public about all finance companies. Even in the past, a few politicians made similar attempts and, particularly in the aftermath of the Golden Key crisis, some politically motivated economic hit men tried their utmost to bring about de-stability by predicting horror scenarios.

Some of them even warned about an imminent collapse of a large number of finance companies, and some went to the extent of prophesizing the collapse of the entire economy! As is of course now known, none of those dooms-day scenarios materialised, much to the disappointment of these economic hit-men! Nevertheless, these elements continue to resort to these unsavory practices, but fortunately, the public is now getting used to these efforts and is wary of these economic hit men. In that background, it must be reiterated that public confidence in the financial sector is strong, and NBFIs in particular, are taking steps to convey their individual and collective strengths to the public, in order to confirm their own strength and stability".

(JH)