Business

Central Bank cracks whip on finance companies

– TKS Finance license cancelled

– Sinhaputhra and The Finance Company under close watch

The Central Bank of Sri Lanka (CBSL) cracked its whip on troubled finance companies last week with several decisive regulatory actions, including the cancellation of a license.

The companies that were subjected to the CBSL’s tight regulations are TKS Finance Ltd. (TKSF), Sinhaputhra Finance PLC, and The Finance Company PLC.

The license of TKSF was cancelled due its failure to comply with the provisions of the Finance Act. The Finance Company has been provided a limited time period to find a potential investor while Sinhaputhra Finance was given time to implement a proposed capital augmentation plan.

However, all three finance companies were earlier issued notices of license cancellation and were provided an opportunity to raise objections or provide justifications for their conduct. However, the CBSL was not satisfied with the objections raised by TKS, while the other two companies were provided some leeway.

TKS Finance

On Thursday (19), the CBSL cancelled the license issued to TKSF under the Finance Business Act No. 42 of 2011 (FBA) with immediate effect, three days after extending the regulatory actions imposed on The Finance Company PLC on for a one-month period.

 

Established in 2006, TKSF is a subsidiary of the TKS Group and was financially backed by Malaysian investors.

In a press communiqué, the CBSL stated that it arrived at this decision after taking several regulatory actions and allowing TKS the opportunity to provide justifications for violating/contravening the provisions of the FBA.

The Central Bank said that TKSF has continuously been violating/contravening the provisions of the FBA and several directions and rules issued thereunder. It added that the financial condition of TKSF is not satisfactory due to the deficient capital level, poor asset quality, continuous losses, and failure in repaying depositors’ money on demand or at maturity, etc.

Despite several time extensions granted to TKSF by the Monetary Board of the CBSL to comply with the provisions of the FBA and directions and rules issued thereunder, no satisfactory progress had been made in order to revive the critical condition of TKSF in order to comply with such provisions, directions, and rules.

Considering these concerns, the Monetary Board took numerous regulatory actions, including imposing maximum ceilings on deposits and borrowings, the suspension of accepting new deposits, suspension of granting new loans and advances, and restrictions on investment activities, CBSL said.

However, since there had been no satisfactory progress at TKSF even after such regulatory actions were taken, the Monetary Board issued a notice of cancellation of the license issued to TKSF on 10 July 2019. TKSF had the opportunity to tender its objections, in writing, for the notice of cancellation of the license within the time period stipulated in the FBA, giving reasons as to why the license issued to TKSF should not be cancelled. Accordingly, TKSF submitted its objections to the Monetary Board by their letters dated 2 and 8 August 2019.

As the reasons/proposals given in the objections did not provide sufficient and substantial grounds for the CBSL to withdraw the notice of cancellation of the license, the CBSL had, in terms of Section 37 of the FBA, decided to cancel the license issued to TKSF under the FBA to carry on finance business with effect from 19 September 2019.

The Sri Lanka Deposit Insurance and Liquidity Support Scheme (SLDILSS) will take necessary actions to pay compensation to the insured depositors of TKSF up to a maximum of Rs. 600,000 per depositor as per the regulations of the SLDILSS, CBSL said, adding that depositors may also be able to recover part of their remaining deposits through the process of liquidation subject to the regulations relating to priority of claims in a winding up of a finance company.

All debtors of TKSF have been advised to pay their dues to TKSF on time only through a bank account under the name of TKSF and maintain records for all payments to avoid litigation against the debtors of TKSF, the CBSL said. Therefore, depositors have been requested to co-operate with the CBSL in this regard.

The Finance Company

The CBSL decided to extend the regulatory actions imposed on The Finance Company PLC (TFC) for a one-month period from 15 September 2019, along with further actions on cost-minimising measures to safeguard the interest of the depositors and other creditors and to facilitate a potential investor for TFC.

The extended regulatory actions include the suspension of accepting new deposits, withdrawal of deposits, and disbursement of loans and advances to facilitate the restructuring process of TFC.

In February this year, the CBSL issued a notice saying that TFC was severely impacted by the failure of a number of financial institutions within the group in 2008 and since then, the financial status of the company deteriorated gradually and is currently with severe liquidity issues, which need to be addressed immediately.

The notice further noted that although several efforts were made to identify prospective investors and to restructure the company, such efforts had not materialised yet, and the continuity of its status would be further detrimental to the interest of depositors and other stakeholders of the company.

Therefore, the CBSL decided to take a number of regulatory actions as temporary measures under the provisions of FBA, with effect from 15 February 2019, with a view to safeguard the interest of the depositors and other stakeholders of the company.

Proposed regulatory measures included suspension of accepting new deposits, restrictions on withdrawal of deposits, and restricting the disbursement of loans and advances to facilitate the restructuring process of TFC.

In order to facilitate the restructuring process, a panel of experts in banking and finance were also appointed by the CBSL. The company was advised to continue to negotiate and finalise the proposals of prospective investors and the CBSL would facilitate TFC to proceed with the suitable investors as per the applicable laws and regulations. At the same time, all borrowers of the company were strictly advised to pay their dues.

It was further expected that these measures would greatly assist potential investors of TFC and ensure the safety and soundness of the financial system.

In May this year, the Monetary Board extended the regulatory actions taken on TFC for three months with effect from 15 May. Issuing a statement, the CBSL said that this step was taken under the provisions of the FBA, and assured that the interest due on deposits was to be paid continuously.

On 15 September, the CBSL said that the TFC had not found a suitable investor to revive the company and it was now vital to find an acceptable investor to bring in equity capital to TFC within an agreed time frame in order to avoid further deterioration of the financial condition of the company.

Therefore, the Monetary Board now instructed TFC to call for expressions of interest (EOIs) from potential investors with immediate effect, and to request such investors to submit their business restructuring proposals to revive TFC. The CBSL will facilitate TFC to proceed with suitable investors as per the applicable laws and regulations.

Sinhaputhra Finance

However, later on Friday (20), the CBSL provided another finance company, Sinhaputhra Finance PLC (SFPLC), an opportunity to implement a proposed capital augmentation plan within the time frame stipulated in the interest of depositors.

On 2 September, the CBSL had issued a notice of license cancellation to SFPLC due to its critical financial condition and continuous noncompliance with the regulatory requirements imposed by it.

Even though the CBSL issued a license cancellation notice, SFPLC was still given the opportunity to tender its objections to the notice of cancellation of the license within the time period stipulated in the FBA, giving reasons as to why the license issued to them should not be cancelled. Accordingly, SFPLC has submitted its objections to the Monetary Board along with a capital augmentation proposal.