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Flexibility within limits – the underlying premise driving the NBFI sector

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By Niroshan Udage

Council Member of The Finance Houses Association of Sri Lanka

As an integral part of the Country’s financial system, Licensed Finance Companies (LFCs) and registered leasing companies play a vital role in the development of the national economy. Collectively known as the Non-Bank financial (NBFI) sector, they offer a gamut of financial solutions to cater to individuals, proprietors, partnerships, corporates or business conglomerates. Most NBFI’s have also invested in developing an extensive island-wide presence that allows them to reach all sectors, social backgrounds and economic levels. Their ability to serve a wider cross section of the market makes the NBFI sector a key contributor towards the development of the SME and Micro enterprise segment in Sri Lanka. Leveraging on the expertise gained by serving the local SME and Micro segment, a few NBFI’s have even ventured outside Sri Lanka to set up operations overseas.

Regulatory supervision, governance and compliance

Dealing with the SME / Micro segment has resulted in NBFI’s being subject to increasing regulatory controls in the past few years.

As the words ‘Licensed Finance Companies’ denote LFCs are licensed and regulated by the Central Bank of Sri Lanka (CBSL).

LFCs conduct their business in conformity with the provisions of the Finance Business Act No.42 of 2011, Finance Leasing Act No.56 of 2000, Directions, Rules and Guidelines issued the said Acts, Consumer Credit Act, No.29 of 1982, Financial Transactions Reporting Act No.6 of 2006 and Prevention of Money Laundering Act, No.5 of 2006, under the direct supervision of CBSL and other applicable Statutes. Through these Statutes and regulations CBSL regulates the finance business and the finance leasing business to ensure the orderly function of the financial system.

In addition, LFC’s are required to abide by the Corporate Governance Directions issued by the CBSL. This helps to create an environment of trust, transparency and accountability, which is required to foster long-term investment, financial stability and enhance the business integrity of LFCs.

Another Direction noteworthy of mention is the Financial Customer Protection Framework outlined in Finance Business Act Direction No.01 of 2018 and the detailed Guidelines thereon. This direction provides the platform for customers of LFCs to assert their rights and to ensure that their rights are safeguarded. The key objective of the said Direction is to safeguard the interests of the customers and build trust in order to strengthen customer confidence in the sector. Since being introduced in 2018, the Financial Customer Protection Framework has become an integral part of the corporate governance culture and strategic decision making of the Boards of LFCs.

To ensure compliance with the applicable laws and regulations, LFCs have established a very strong and robust Compliance function, which is subject to regular reporting and monitoring by the CBSL.

The Challenge

Despite the stringent business and regulatory environment governing the NBFI’s, it is unfortunate that there is still a segment of the general public who have a negative perception towards the sector. Such unfounded perceptions appear to have arisen primarily due to the lack of awareness regarding the pricing mechanism and the foreclosure process followed by the NBFI sector. The purpose of this article is to provide some much needed clarity on these topics.

The Pricing Mechanism adopted by the NBFI sector

It is no secret that compared to the banking sector, the pricing structure of the NBFI sector for similar products is relatively higher. There are several fundamental reasons for this. Firstly, it is important to understand that the NBFI caters mainly to the SME and Micro segment of the market. Based on their profiles, SME and Micro segment customers fall into the high-risk category.

The typical SME / Micro customer who is often overlooked by the banking system due to their lack of credentials and financial sophistication, is then motivated to approach the NBFI sector with the expectation that their credit applications will be processed expeditiously even without necessary documentary proof or credentials. This puts NBFI’s in a tough spot. On the one hand NBFI’s are expected to be more flexible in their decision making process in order to secure their customer, while on the other hand they need to comply with established risk appetite limits in order to safeguard the business. Amidst this backdrop, the only rational way for NBFI’s to strike a balance is by building in a higher risk premium into their pricing structure. And with SME / Micro customers also likely to be more vulnerable to economic shocks, especially given their position at the lower end of the pyramid, NBFI’s are compelled to factor-in additional risk premiums into their pricing structure. Meanwhile being in the high-risk category, the cost of managing SME / Micro customers is also comparatively higher. From the additional background checks to site visits and managerial oversight to encourage customers to adopt proper financial control and discipline, NBFI’s incur significantly higher operational costs per customer, which leaves these companies with no option but to build cost buffers into their pricing structure.

Another key element that drives up the NBFI’s pricing structure is their high cost of funding. Unlike Banks, which have access to low cost funds through their CASA (Current and Savings Accounts) base, NBFI’s are funded largely by public deposits and often have to pay higher rates in order to attract deposits away from the banking system. On average more than 50% of the total interest costs of NBFI’s go towards servicing deposits. Lowering these cost elements is an extremely difficult task since NBFI’s do not have access to free funds such as current accounts.

Despite these challenges however, some NBFI’s have adopted dynamic pricing strategies in line with their business model and risk appetite, enabling them to offer very competitive rates, often on par with the banks. In this manner, the NBFI sector has remained firm in its commitment to nurture the SME / Micro segment – the “infants” of the economy, to the level of bankable customers, thereby contributing towards improving the Country’s overall credit culture over time.

Regulated foreclosure process

In the interest of protecting the rights of both Lessees and Lessors, NBFI’s follow a highly regulated foreclosure process for the repossession of assets. They cannot deviate from the repossession guidelines set out under the Finance Leasing Act, No.56 of 2000. The Finance Leasing Act was enacted in the year 2000 to provide for the regulation and monitoring of finance leasing businesses, to specify the rights and duties of Lessors and Lessees and suppliers of equipment and for matters connected therewith or incidental thereto. It is mandatory that all NBFI’s strictly adhere to the provisions of the Finance Leasing Act when engaging in the business of leasing.

Accordingly, a repossession notice can be issued only if the installments are in arrears more than the limit of substantial failure. However as directed by the Act, repossession is sought only as the last resort for the recovery of outstanding installments. Repossession orders are issued only after sending reminders, notices and notices of termination to Lessees and Guarantors according to the Act, within the stipulated timelines.

During the period leading up to the issue of a repossession order, NBFI’s are expected to make every endeavor to collect the installments in arrears, by visiting the customer, through telephone calls etc. The Act further states that if the Lessee is genuinely in a difficulty due to an unforeseen event, they are always welcome to visit the respective NBFI and make a formal request for deferment of recovery action. At this point NBFI’s are required to look into every avenue to offer relief to the customer including granting of concessions / deferment, whenever they are warranted.

Meanwhile if the leased property is repossessed, it is disposed of quickly in order to recover the outstanding according to the auction procedure that is laid down in the Act. Once the vehicle is repossessed, the final notice is sent to the Lessee giving a further 14 days for settlement. A newspaper advertisement is published in all 3 languages advertising the sale. At the same time, another letter is sent to the Lessee allowing a further 7 days for settlement of the outstanding. Finally, when the time period lapses, the repossessed vehicle is sold through tender process or at a public auction. Prior to the public auctions another paper advertisement is published which is the end point of the auction procedure.

Conclusion

It is hoped that this article provides some reasonable clarity regarding the framework within which NBFI’s operate, while also helping to alleviate some of the persistent misconceptions that have plagued the sector. Going forward, it is imperative that NBFI’s continue to serve the target market in utmost good faith. It is equally important that all players collaborate with the regulatory authorities to uphold the integrity of the NBFI sector at all times.

The writer is an Executive Director of LB Finance PLC with 30 years of experience in the Finance industry.

 

 



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Daraz donates Rs. 2 million to ITUKAMA COVID-19 Healthcare and Social Security Fund

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Daraz showcased their perseverance in combatting the effects of the ongoing COVID-19 pandemic through their donation of Rs. 2 Million and the supply of PPE kits to the ITUKAMA COVID-19 Healthcare and Social Security Fund.

The donation was handed over to Prime Minister Mahinda Rajapaksha at the Temple Trees on 19th July 2021, in the presence of the Minister of Youth and Sports, and State Minister of Digital Technology and Enterprise Development, Namal Rajapakse and State Minister of Provincial Council and Local Government, Minister Roshan Ranasinghe. Representing Daraz Sri Lanka were Managing Director, Rakhil Fernando, Chief Operations Officer, Darshika Attanayake and the Head of Administration, and Procurement, Malith Ranadewa.

The ITUKAMA project is a fund raising initiative for the COVID-19 Healthcare and Social Security Fund established by President Gotabaya Rajapaksa to support the mitigation of the spread of COVID-19. Initially established with a donation of Rs 100 million from the President’s Fund, the fund aims at securing the safety of those in the health sector and other essential service providers while facilitating the aid of those made vulnerable by COVID-19. It simultaneously supports the improvement of Sri Lanka’s long term vigilance and preparation for future health emergencies.

Daraz has played an active role in supporting the community through a series of CSR initiatives spearheaded under Daraz Cares, since the onset of the pandemic and will continue to do so by aiding the government of Sri Lanka.

(Daraz)

 

 

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Ceylinco Life opens latest Green branch on company land in Piliyandala

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(Above, from left) Ceylinco Life Chairman R. Renganathan, Managing Director Thushara Ranasinghe and directors Messrs Devaan Cooray, Palitha Jayawardena and Ranga Abeynayake at the opening of the company’s new Piliyandala branch.

 

Ceylinco Life has placed another Green pin on its branch map with the opening of its latest eco-friendly branch in Piliyandala in a purpose-designed building constructed to the environment-friendly specifications adopted for all new branches on company-owned land.

Intended to reduce the Company’s carbon footprint while improving the customer and employee experience, the latest branch is located at No. 192, Horana Road, Piliyandala, on three floors that provide 5,683 square feet of space.

An investment of Rs 54 million, the Piliyandala branch completed in 11 months is designed for optimal use of natural light, is powered entirely by a 20kW solar power system that results in zero consumption of electricity from the national grid, and has its own waste-water recycling system. It is also equipped with the latest energy-efficient artificial lighting and air conditioning systems, has a rainwater harvesting facility and uses minimum amounts of pipe-borne water.

While the construction was designed to require minimum quantities of timber, trees planted in the premises upon completion of the building, further contribute to the Company’s Green agenda.

The building will function as an office for the Ceylinco Life branches in the Piliyandala area. With ample dedicated parking bays for visitors, it is designed to enhance customer convenience. In the same vein, the branch features private discussion rooms to ensure customer privacy within the premises and to deliver specialised customer handling processes by a team of well-trained and experienced employees, the Company said.

A cash deposit machine is deployed at the branch to enable deposits of policy premiums even during non-office hours and on holidays.

Ceylinco Life has been protecting the lives of the residents of Piliyandala and its suburbs via a dedicated branch since 1992. The newest branch is the seventh in the Colombo district to operate in a Ceylinco Life owned building and is the 43rd building owned by the company.

Ceylinco Life is in the process of constructing another Green building for its branch in Ja-Ela. The Company currently owns the buildings housing its offices in Anuradhapura, Trincomalee, Jaffna, Batticaloa, Kandy, Kalutara, Kurunegala, Gampaha, Galle, Matara, Tissamaharama, Negombo, Ratnapura, Kotahena, Mount Lavinia, and Wellawatte, many of which have already been converted to solar energy. New branch buildings purpose-built to the company’s sustainable energy model are those at Horana, Panadura, Wennappuwa, Bandarawela, Chilaw, Kadawatha, Jaffna, Malabe, Divulapitiya, Negombo, and now Piliyandala.

Ceylinco Life operates the largest network of 272 branches in Sri Lanka’s life insurance industry, giving it a physical presence in 142 cities, towns, and villages in every one of the island’s 25 districts.

Ranked the ‘Most Valuable Life Insurance Brand’ in Sri Lanka by Brand Finance and voted the ‘Peoples Life Insurance Service Provider of the Year’ for a record 15th consecutive year in 2021, Ceylinco Life has been Sri Lanka’s leading life insurer for more than half of the 33 years it has been in existence. In 2020, the Company was certified as a ‘Great Workplace’ in Sri Lanka by Great Place to Work®, was named the ‘Best Life Insurer in Sri Lanka’ for the seventh consecutive year by World Finance, and accorded an ‘Honourable Mention’ as one of the ‘Most Admired Companies in Sri Lanka’ by the International Chamber of Commerce Sri Lanka (ICCSL) in collaboration with the Chartered Institute of Management Accountants (CIMA), UK.

Ceylinco Life has close to a million lives covered by active policies and is acknowledged as a benchmark in the local insurance sector for innovation, product research and development, customer service, professional development, sustainability, and corporate social responsibility.

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IRD and SLPA payments via Pan Asia internet banking

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Aligned to its strategy to extend the highest convenience and superior customer experience, Pan Asia Bank is the first bank in Sri Lanka to integrate with the LankaPay Online Payment Platform Common Interface, through which its customers can make payments to the Inland Revenue Department and Sri Lanka Ports Authority via Pan Asia Internet Banking.  

Customers wishing to pay taxes will no longer need to go through the hassle of depositing cheques for tax payments by visiting other bank branches. Instead, by simply logging into the Pan Asia Internet banking facility, they can now make their tax payments at a nominal and fixed transactional fee of Rs. 50/- irrespective of the value of the tax payment. The system supports tax payments up to Rs. 10 billion in value via a single transaction. This innovation offers a convenient, cost-effective and efficient option for taxpayers. 

Facilitated via LankaPay Common Electronic Fund Transfer Switch (CEFTS), these payments will be credited real-time 24X7 x 365. The system provides its participants with the required payment confirmation details on a real-time basis.

LankaClear launched LankaPay Online Payment Platform in 2017 under the direction of the Central Bank of Sri Lanka, with the objective of digitally empowering government agencies by enabling large value transactions to be accepted via digital means.

Pan Asia Bank has been on digital transformation journey and this digital enhancement further strengthens its position as The Truly Sri Lankan Bank that puts customer convenience at the heart of its operations.

 

(Pan Asia Bank)

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