Tuesday, December 4, 2012

NBFIs profits slump

Three years after an industry-wide crisis, the country’s non bank financial institutions have seen a marginal drop in profitability during the first eight months of this year as interest margins declined.

Higher interest rates have spurred deposit growth, dampened credit growth and surprisingly, non performing loans ratios have fallen, the Central Bank said in a recent report.

"The Non-Bank Financial Institutions (NBFIs) Sector expanded further during the first eight months of 2012. Total assets of the sector expanded by 13 per cent (Rs. 63.7 billion) compared to the growth of 15 per cent (Rs. 56.4 billion) in the first eight months of 2011. The NBFIs consist of 44 Licensed Finance Companies (LFCs) and 13 Specialised Leasing Companies (SLCs), which are under the regulatory and supervisory purview of the CBSL. While two new entrants and three SLCs obtained LFC status, the branch network expanded by 78 to 782 branches during the first half of 2012," the Central Bank said in its report ‘Recent Economic Developments: Highlights on 2012 and Prospects for 2013.

"Deposits grew at a faster rate in response to competitive interest rates offered. Deposits grew by 22 per cent (Rs. 41.3 billion) to Rs. 227billion in the first eight months of 2012 compared with the growth of 21 per cent (Rs. 30.1 billion) in the corresponding period of 2011, while borrowings marginally decreased by 1 per cent in the first eight months of 2012.

"A moderation in credit growth was seen, as demand for vehicle leases and hire purchases declined due to increased prices of motor vehicles. Credit provided by the NBFIs increased moderately by 14 per cent in the first eight months of 2012 compared to the growth of 29 per cent in the corresponding period of 2011. The tightening of monetary policy, the flexible exchange rate regime, import duty on vehicles and increased fuel costs have stifled the growth of leasing and hire purchases in 2012.

Finance leases and hire purchases grew only by 20 per cent and 3 per cent, respectively, in first eight months of 2012, compared with 60 per cent and 15 per cent, respectively, in the corresponding period of 2011.

"Asset quality improved with a noteworthy decline in non-performing accommodations. Despite higher interest rates, asset quality improved with the gross non performing loan ratio decreasing to 5.2 per cent at end August 2012 from 5.7 per cent at end August 2011.

"The overall liquidity of LFCs improved. The total liquid assets of LFCs increased by 22 per cent during the first eight months of 2012, recording a surplus of Rs. 4.2 billion compared to the overall stipulated minimum requirement of Rs. 23 billion. This was attributed to the turn around of several distressed companies, which now have improved liquidity positions as well as increased earnings and growth in funding channels.

"The capital position of NBFIs strengthened with new capital infusions. Capital funds increased by 22 per cent in the first eight months of 2012 and the Capital Adequacy Ratios of the NBFIs exceeded the regulatory minimum requirement. Subsequent to the listing on the CSE, several NBFIs brought in new capital through rights issues and strategic investments. As at end August 2012, the core capital ratio was 17.2 per cent and the total capital ratio was 17.8 per cent, well above the statutorily required 10 per cent.

"NBFIs recorded profits but declined marginally. Profits of the NBFIs declined in the first eight months of 2012 to Rs. 10.1 billion from Rs. 11.3 billion in the corresponding period of 2011. The annualised ROA and ROE were lower at 3.9 per cent and 18.3 per cent, respectively, for the eight months period ending August 2012, compared with 5.3 per cent and 30.1 per cent, respectively, as at end August 2011, as the interest margins declined.

"Efforts to restructure and recapitalise the remaining distressed companies continued. Strategic investors were found for all seven distressed companies of which five distressed NBFIs are currently carrying on regular business operations as a result of the resolution measures being adopted by the Central Bank since 2009. The remaining companies are expected to commence their business as soon as the new investors take over the management.

"Four NBFIs obtained listing on the CSE during the first eight months of 2012 bringing the total number of NBFIs listed on the CSE to 32 as at end of August 2012. The remaining unlisted LFCs (apart from a few distressed companies) have been given time targets by the Central Bank based on each company’s financial positions to obtain listing on the CSE.

"Several measures were introduced to streamline the operations of NBFIs. The maximum limit on rates of interest that could be offered by LFCs on time deposits and non-transferable Certificates of Deposits were revised while allowing for an additional 1 per cent interest above the ceiling for senior citizens. A circular was issued to all SLCs regarding the maximum rate of interest that could be offered on debt instruments, which is 1 per cent higher than the maximum limit for rates of interest offered by LFCs. A new Rule was issued with the objective of streamlining the application process for issuance of a license for a new finance business to be in line with the Finance Business Act No. 42 of 2011. The annual licensing fees were revised upwards as the regulatory / supervisory cost of the Central Bank has increased significantly.

"Minimum core capital requirement for SLCs was raised, with a view of promoting their financial soundness. The minimum core capital to be maintained by SLCs, which was Rs. 100 million until end December 2012 was increased to Rs. 150 million, to be effective from 01 January 2013 and further raised to Rs. 200 million, Rs. 250 million and Rs. 300 million to be effective from 01 January 2014, 2015 and 2016, respectively. A direction was issued to SLCs on the assessment of fitness and propriety of all directors and officers performing executive functions to promote good governance and effective risk management in SLCs. An amended liquid assets direction was issued in July 2012 for all SLCs, requiring the maintenance of liquid assets, not less than 5 per cent of the total liabilities and off-balance sheet items excluding the shareholders liabilities, securitisations and asset backed long term borrowings with effect from 01 September 2012 and not less than 10 per cent with effect from 01 July 2013 in order to enable companies to gradually improve their liquidity levels," the Central Bank said.

source - www.island.lk

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