Restriction on deposit mobilisation may hit SMEs

Final decision after consultations:

By Lalin Fernandopulle

The Finance Houses Association (FHA) expressed concern over the proposal mooted by the Central Bank to restrict deposit mobilization by finance companies to minimize risk and strengthen the Non Bank Financial Institution (NBFIs) sector.

The Central Bank will consult finance companies before making a final decision.

Central Bank Governor Arjuna Mahendran said the idea to restrict deposit mobilization by finance companies was a proposal by Finance Minister Ravi Karunanayake. "We will not rush to take a decision," he said.

FHA, President and LB Finance, Executive Director Ravi Yatawara said the Central Bank is in the process of bringing in restrictions on deposit mobilization by finance companies going by a model followed in India where certain small financial companies are not allowed to mobilize deposits but need to find their funding from the banking sector.

He said restricting deposit mobilization by finance companies will adversely affect small and medium scale enterprises. Micro level entrepreneurs and senior citizens who gain immensely from micro lending schemes operated by finance companies to support self-employment initiatives, provide capital for new enterprises and help senior citizens to enjoy a better return on their deposits.

Financial institutions, comprising around 48 in the country, play a pivotal role in the economy by promoting financial inclusion which makes financial services affordable to disadvantaged and low-income segments of society in contrast to financial exclusion where services are not available or affordable, he said.

Banks account for around 88 percent of the loan portfolio in terms of rupee value while financial companies account for around 35-40 percent of the number of loans granted due to its vast micro level lending schemes which are backed by assets and personal guarantors.

Finance companies pay two to three percent interest above bank rates for fixed deposits. The fixed deposit ceiling for senior citizens is 13.5 percent and 12.5 percent for others.

However, the Governor said steps will be taken to protect depositors to avert recurrence of major risks certain finance companies ran into in the past putting depositors in trouble.

The Central Bank has a deposits guarantee mechanism to ensure the safety of deposits. India and Thailand have taken measures to restrict deposit mobilization to minimize risk.

The FHA also expressed concerns over certain delays in granting approval by the Monetary Board of the Central Bank for opening up branches by NBFIs.

An official of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank said finance companies did not object when this decision was taken.

The granting of approval for opening up branches by NBFIs is now vested with the governor and the monetary board of the Central Bank under a guideline that came to force from this year.

Prior to it the Department of Supervision of Non-Bank Financial Institutions of the Central Bank was vested with authority.

Yatawara said the FHA has agreed to follow the new guidelines with regards to opening new branches from this year but requests the Central Bank to reconsider the approvals which have been rejected where certain finance companies have already made commitments in terms of renting out premises and staff recruitment carried out last year.

The Central Bank considers the potential for another branch in a location prior to approving a branch opening by a finance company.

It takes into account how solid the company is in terms of capital, profitability and its management. The Central Bank is also in the process of changing the financial year for financial institutions to December 31 from the current March 31 year ending to be in line with the financial year of banks.