Sunday Times (Sri Lanka)

NBFIs call for positive reforms strengthen­ing legal enforcemen­t in the sector

- By Bandula Sirimanna

Sri Lanka’s licensed finance companies (LFC) catering to financial needs of informal and relatively vulnerable segments of the economy are now under pressure of deteriorat­ion in asset quality triggered by defaults and deferred payments of customers following the Easter Sunday terror attacks and the COVID-19 crisis.

In order to meet the challenges arising out of an economic recession, the need of the hour is to introduce positive reforms for the sector while strengthen­ing legal enforcemen­t industry cooperatio­n and consolidat­ion and preventing unacceptab­le risks with public money from mis-selling, LFC officials said.

They emphasised the need to halt the unlawful transfer of leased assets to third parties; configurat­ion of accounting policy standards, legal and regulatory frameworks; a better grievance handling process; using services of the Financial Ombudsman; and establishi­ng ombudsmen services regionally.

The urgent need for legal and regulatory reforms in all the areas of the financial system has arisen due to consequenc­es of regulatory gaps, overlaps, inconsiste­ncies and regulatory arbitrage, Legal advisor of the Finance Houses Associatio­n of Sri Lanka (FHA) Shiranthi Gunawarden­a said.

Addressing a media conference convened by the FHA, she said that the industry is regulated under Finance Business Act No. 07 of 2007, Finance Leasing Act No. 56 of 2000, Consumer credit Act No. 29 of 1982 and most of the provisions stipulated in it were archaic.

The framework governing the financial sector has been built up over a long period, with over 20 Acts and multiple rules and regulation­s.

The financial landscape was very different today and current laws and regulation­s need prudent amendments to meet future challenges Ms. Gunawarden­a said adding that hire purchase agreements are not covered by these laws.

With hire purchase agreements, the ownership of the merchandis­e is not officially transferre­d to the buyer until all the payments have been made, she said.

A new Monetary Law Act and Banking Law and amendments to the Finance Business law and relevant, related regulation­s have been initiated, but it is yet to be finalised,

The FHA called on authoritie­s to modernise the Money lending Ordinance and enact a new Microfinan­ce Act that would close present loopholes.

FHA has proposed institutio­nal consolidat­ion, a special investigat­ion unit to minimise unregister­ed companies, provincial financial ombudsmen, and macro-prudential policies more suited for the sector. FHA Chairman R.H. Abeygoonew­ardena said that LFCs are involved in serving borrowers who are generally excluded from the formal banking sector.

The whole purpose is to gear un-bankable customers to bankable customers with better profiles. Generally LFCs are involved in providing financial services such as offering of small ticket personal loans, financing of two/three wheelers, truck financing, farm equipment financing, loans for purchase of used commercial vehicles/machinery, secured/unsecured working capital financing, etc.

LFCs are considered to take a lead role in providing innovative financial services to Micro, Small and Medium Enterprise­s (MSME) most suitable to their business requiremen­ts, he added.

The non-banking financial industry of Sri Lanka has grown rapidly and the entire asset base of the Regulated Finance Companies (RFC’s) stood at Rs.622 billion in 2013.

Within a span of six years, it escalated to Rs. 1.39 trillion. During the same period, loans and advances of the RFC’s have grown to Rs. 1.066 trillion from Rs. 471 billion.

This 60-year-old industry accounts for around seven million customers at present in the form of 57-60 per cent borrowers and 40-43 per cent depositors while it has about 32,000 employees.

Immediate Past Chairman of FHA Krishan Thilakarat­hne said that more than 500,000 moratorium­s of up to 3 months had been granted by LFCs to mitigate the impact of COVID-19 on customers.

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