Sri Lanka’s Licensed Finance Companies (LFCs) will be facing stringent regulations from the Central Bank (CB)’s Monetary Authority with ownership limits, ensuring higher capital adequacy, loan loss provisioning and improved reporting standards.
Calling for stakeholder observations, the CB recently released a concept paper introducing ownership limits of the LFCs to 25 per cent within five years.
The will be provisions to increase the ownership limit to 30 per cent under special circumstances and LFC stakeholders could submit their views till June 14.
Non-compliance will result in suspension of business activities and cancellation of license.
The new regulations have been imposed to maintain a minimum of 10 per cent capital adequacy to be increased to a minimum of 10.5 per cent by mid this year with a target to reach 12.5 per cent by mid-2021.
Capital adequacy levels of the LFC sector are to be strengthened and the LFCs which fail to comply will be encouraged to consolidate on a voluntary basis.
Non-compliance will result in restrictions on deposit and business expansion and, where necessary, winding up of businesses,Cenral Bank said.
New guidelines will be issued to strengthen financial reporting of LFCs and the sector needs to cope with enhancement of the minimum capital requirement and higher loan loss provisioning with the introduction of Sri Lanka Financial Reporting Standards 9.
While capital and liquidity indicators remain adequate, non-performing loans increased to 7.7 per cent in NBFIs as of end-2018 due to the economic slowdown, with provision coverage declining to 57 per cent, the CB announced.
Moreover, the phased introduction in January 2019 of new capital and liquidity requirements under Basel III and the ongoing adoption of IFRS 9, with stricter asset classification and provisioning, will require additional efforts to meet capital requirements.
Challenges will be greater in the LFC sector, which accounts for 7.6 per cent of financial system’s assets, where further consolidation is expected to meet capital needs.
(LI)