Three out of seven registered finance companies hit by the global finance crisis are now back in business owing to crisis resolution and regulatory measures taken by the Central Bank, said Ms. Nelumani Daulagala, Director Non-Bank Supervision at the Cental Bank, delivering a lecture on “Taming the Beast in the Forest: Experiences from the Finance Companies” at the Central Bank's Staff Training Centre Auditorium in Rajagiriya on Thursday.
She said that the liquidity and insolvency crisis was confined to a few companies within two groups namely the Ceylinco group (five registered finance companies and one leasing company) and Aspic Group (two registered finance companies). She revealed that one registered finance company (The Finance Company) has completed the conversion of deposits into equity and its public issue had been completed.
Strategic investors have been found for three registered finance companies and one leasing company. Prospective strategic investors are being reviewed for other companies, she said.
Sri Lanka’s finance companies’ crisis triggered by the Sakvithi Financial scam and the collapse of Golden Key Credit Card Company in 2008, was averted due to the intervention of the Central Bank in a flexible manner and various crisis resolution and regulatory measures taken by the bank, Ms. Daulagala disclosed. No public funds were used to resurrect these companies as the crisis was due to the lapses of directors and managers. Directions were issued to these companies to restructure balance sheets to attract investors, convert deposits into equity, reschedule deposits and interest rates, immediately dispose real estate properties, recover dues from related companies and convert debt to equity. Distressed companies will also be required to list in the Colombo Stock Exchange within 12 months after implementing their restructuring plans.
She noted that there were several common issues behind the collapse of these finance companies. These issues were excessive exposure to real estate; imprudent related party transactions and investments; unauthorized deposit taking by related companies; weak risk management systems; unethical business practices; mismanagement; and corruption negative capital and accumulated losses.
She said that Sri Lanka has strengthened the regulatory framework to prevent any future financial crisis.
A new Finance Act and a deposit insurance scheme have been introduced as major steps towards this end. It will update the law on par with the technological advances and to combat unauthorized deposits to ensure the stability in the financial sector, she said. Accordingly, acceptance of deposits without the approval of the Central Bank will be made an offence and a definition of a ‘deposit’ had been introduced with enhanced examination and investigative powers being given to authorities to check on the accounts of financial institutions.
Action has been taken to increase the minimum capital requirement and new liquidity and capital adequacy requirements have been introduced. Restrictions were imposed on related party transactions while strengthening fit and propriety requirements for directors and executives. A panel of auditors has also been introduced, she revealed.
According to Central Bank sources, five Ceylinco entities – Ceylinco Golden Key Credit Card Company Ltd, Ceylinco Finance and Guarantee (F&G), Ceylinco Investment and Realty (CIR), Ceylinco Profit Sharing Ltd, and Ceylinco Shriram, were hit during the recent global financial crisis.
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