Restriction on deposit mobilisation may hit SMEs
Final decision after consultations:
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
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
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
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.