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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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‘Revenue collecting PCs had only Rs. 40 billion for public service in 2021’

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Pasanda Yapa Abeywardena

By Sanath Nanayakkare

There wouldn’t be a better time for major political parties to discuss and arrive at a consensus for abolishing the revenue-collecting provincial council system which hasn’t done anything more than just distributing government-sponsored welfare goods to the people, Pasanda Yapa Abeywardena, chief organiser of Lankalokaya and former provincial councilor said at a press conference in Colombo on January 19.

Pasanda who enjoys familial relationships with political higher-ups in the country while being the current chairman of Sathosa said that the President of Sri Lanka can travel across the island by helicopter in just one and a half hours which is only the size of Virginia in the United States, but has so many layers of governance including executive presidency, parliament, provincial councils, district secretariats, local government institutions etc.

“It is a known fact that provincial councils are mere training centres for the offspring of senior politicians and there is a demand in the country for cost-effective small government. In such a context, all political parties should have a dialogue in the next six months to abolish provincial councils, and strengthen the local government bodies through district development councils administered by the central government. Such a mechanism would reduce administrative layers while expanding the effective understanding of policies made by the government. Then the decisions made by the cabinet of ministers will easily flow to the ground level and the implementation process will be more dynamic. The President also has expressed similar views in this regard, he said.

“In the year 2021, revenue of provincial councils amounted to Rs. 331 billion while total expenditure was Rs. 316 billion, out of which Rs. 279 billion was spent on the payroll without having to bear the costs of provincial councilors. All in all, the provincial councils had only about Rs. 40 billion to spend on public services,” he said.

“In fact, I know from experience that nothing meaningful could be achieved through provincial councils other than merely being an institution of the central government that distributes chairs, mammoties etc., given by the government where provincial councilors claim to be the benefactors.”

“Provincial councils came to its end of term in April 2019 and five years have lapsed since the defunct of the system. Nevertheless, there is no public outcry to restore the system. PC system has never contributed to making any laws of the country or has never initiated a good programme on its own. So, we urge the political parties to engage in a meaningful discussion in the next six months before the country goes to presidential and parliamentary elections.”

He pointed out that the abolition of the PC system would help reduce the tax burden on the people, and that decision has to be taken well before PC elections are held.

Pasanda added that neither the people in the North of Sri Lanka or the government of India are interested in provincial councils anymore though the system was introduced by then government as a means of power decentralisation in Sri Lanka.”

“India is keen to have an equitable solution to the ethnic issue in Sri Lanka. However, I have reliable information that India doesn’t see provincial councils in the North and East would be an enabler in that quest. So, the abolition of provincial councils won’t trigger any geopolitical tensions with India,” he said.

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HNB Assurance Group surpasses 20% growth mark for the third consecutive year

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HNB Assurance Group recorded yet another year of exceptional performance, marking the third consecutive year of achieving a growth rate exceeding 20% in terms of GWP (Gross Written Premium). The year 2023 witnessed the Group achieving remarkable financial milestones and an array of local and international awards, solidifying its position as a frontrunner in the insurance industry.

HNB Assurance Group recorded a substantial GWP of LKR 18.7 Bn, showcasing a remarkable growth of 20% compared to the previous year. Reflecting on this achievement, Ms. Rose Cooray, Chairperson of HNBA and HNBGI, expressed her delight, stating, “To me personally, the remarkable growth trajectory of the HNB Assurance Group stands as a testament to our commitment to delivering value to our stakeholders. Both teams at HNBA and HNBGI performed an outstanding job, leaving no stone unturned, meticulously analyzing every challenge, and capitalizing on every opportunity. This approach to business was imperative, particularly in the aftermath of COVID-19 and the subsequent economic and social upheaval, where we as a nation encountered numerous challenges in diverse forms. In addition to our consistent growth of GWP, over the past three years, we as a group have so much to celebrate. Our Group assets grew by LKR 10 Bn during the year, well exceeding a remarkable total of LKR 51.2 Bn. Further, investment income for the Group surged to LKR 7.2 Bn, representing an outstanding growth of 49% from LKR 4.8 Bn in the preceding year. In terms of the Group’s profits, we recorded a commendable LKR 1.76 Bn in PAT.”

Honoring claims plays a vital role in maintaining the trust for any insurance company, “I am proud to note that the HNB Assurance Group honored claims of LKR 6.6 Bn, showcasing a growth of 19% compared to the previous year, aptly demonstrating our position as a reliable partner during our policyholder’s time of need.” explained Ms. Cooray.

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Sri Lanka College of Endocrinologists partners with Morison to address the rising challenge of diabetes

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The team members from the Sri Lanka College of Endocrinologists and Morison Ltd, present at the MoU signing

The Sri Lanka College of Endocrinologists (SLCE), the leading authority at the forefront of diabetes management and education in Sri Lanka, has announced a collaborative partnership with Morison Ltd, a pioneer in the Sri Lankan pharmaceutical manufacturing industry, to launch a certificate training program for primary healthcare professionals on diabetes management.

Sri Lanka faces a growing epidemic in diabetes, with an estimated prevalence of one in five Sri Lankans living with diabetes. Primary healthcare doctors are often the first point of contact for patients with diabetes, hence equipping them with specialized knowledge and skills is crucial for early diagnosis, effective management, and preventing complications. The Memorandum of Understanding (MoU) signed between SLCE and Morison on 13th February 2024, reflects a shared commitment to bridge this gap in diabetes expertise and establish primary care as the first line of defence.

The course content developed and delivered by the SLCE, features an evidence-based curriculum, combining theoretical knowledge with practical applications, ensuring participants receive up-to-date knowledge that adheres to the latest Clinical Practice Guidelines and international standards. The program aims to empower primary healthcare professionals to deliver comprehensive diabetes care in their daily practice, including therapeutics, lifestyle counselling, and complication prevention, ultimately leading to improved patient outcomes and reduced burden on the healthcare system. The course, spanning four months, is now open for registrations for the first intake, and the collaboration aims to conduct two such programs per annum.

Dedicated to advancing endocrinology and diabetes care in Sri Lanka, the SLCE spearheads numerous initiatives to educate healthcare professionals on best practices in diabetes management. Dr. Niranjala Meegoda Widanege, President of the Sri Lanka College of Endocrinologists stated, “Equipping our primary healthcare doctors with specialized diabetes knowledge and skills is essential to tackle the growing epidemic effectively. This training program marks a significant step forward in ensuring accessible and quality diabetes care for all Sri Lankans.”

Dinesh Athapaththu, Managing Director, Morison Ltd commenting on the partnership added, “We are pleased to collaborate with the SLCE to bring this meaningful initiative to life. With a patient-centric approach across our value chain, we believe our latest efforts with the SLCE reflects our commitment to deliver a refreshing difference at a time it is most needed by the nation.”

Staying true to their purpose of “Making Premium Healthcare Affordable”, Morison strives to play a major role in the fight against diabetes by bringing the latest therapies closer to the nation with an offering that stands distinctively different with the best of quality and price.

Morison is a truly Sri Lankan pharmaceutical manufacturing company, with a rich legacy of over 60 years of industrial expertise. Their new state-of-the-art manufacturing facility in Homagama, is the largest investment to date in the local pharma manufacturing industry. Being the country’s largest pharma manufacturing facility for general tablets and liquids, it is also the first such facility in Sri Lanka to comply to European Union Good Manufacturing Practices (EU GMP) specifications.

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