Majority of Sri Lanka’s rural finance and lending institutions approved by the Department of Commerce under the Ministry of Industry and Commerce are facing a risk to their credit profiles and deposit base due to mismanagement and lack of proper supervision of the administration, a recent government audit inspection discovered. The situation is grave for [...]

Business Times

Crisis at finance/lending institutions sanctioned by Commerce Dept.

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Majority of Sri Lanka’s rural finance and lending institutions approved by the Department of Commerce under the Ministry of Industry and Commerce are facing a risk to their credit profiles and deposit base due to mismanagement and lack of proper supervision of the administration, a recent government audit inspection discovered.

The situation is grave for depositors of those financial institutions controlled by the department as it is outside the purview of the Central Bank.

The Annual Accounts of approved lending institutions should have been furnished to the Director General of Commerce for the purpose of continuous supervision of eligibility of those institutions, but this was not done by relevant institutions, the Auditor General’s recent report exposed.

Even though the Director of Commerce has the responsibility for supervising the performance of the approved lending institutions, that function had not been performed, the report revealed.

The Director General of Commerce has the authority to declare lending institutions on the recommendation of the Committee by which credit societies are approved, under the Mortgage Ordinance, No.6 of 1949, Trust Receipt Ordinance, No.12 of 1947 and Inland Trust Receipt Act, No.14 of 1990.

The Department of Commerce has declared 375 lending institutions in terms of Section 114(1) of the Mortgage Ordinance, as approved lending institutions for the functions of the said Ordinance from September 1973 to April 2017.

Out of those institutions, 269 institutions are Co-operative Societies and Rural Banks and the 106 remaining institutions are finance companies and banking institutions.

In terms of the Section114(1) of the Mortgage Ordinance, the license which was obtained from the Central Bank should be furnished by the relevant institutions for obtaining the approval for finance companies and banking institutions.

However, the said license had not been obtained for 57 approved finance companies and banking institutions, the government audit inspection found.

A senior official of Cooperative Development told the Business Times that the board of directors is responsible for all financial transactions of the co-operative society and legal action could be taken against the management in case of mismanagement.

These registered societies are authorised to accept deposits from the public and lend monies to their members, he revealed.

He said 56 societies operate under the aegis of the Cooperative Development Department which is also the national level regulatory body.

However a larger number of thrift and credit co-operative societies function under the control of provincial councils, which are also categorised as co-operative banks as they perform banking functions at grass root level.

The Central Bank has no authority over these thrift societies, a senior official of the Central Bank told the Business Times.

According to available data, the co-operative banking system accounts for about 1.5 per cent of the assets of the financial system in the country.

The total amount of deposits in 1619 co-operative rural bank branches including Thrift and Credit societies in the island amounted to over Rs. 25 billion while the advances portfolio was Rs. 8 billion. (Bandula)

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