Financial Fallout

Feb 19, 2010 (LBO) – Sri Lanka’s registered finance companies, which were shaken last year by the collapse of an unregulated firm, may see consolidation especially among weak smaller firms, the Central Bank said. The profitability of the finance company sector declined and some companies made losses last year because of high interest rates and heightened credit and liquidity risks, it said in its Financial System Stability Review 2009.

But it said the sector remained resilient and able to withstand shock as shown by the capital adequacy ratio of the RFCs which stayed significantly above the minimum regulatory requirement.

The minimum capital requirement for RFCs was increased to 200 million rupees in 2008 and most firms have complied.

The banking regulator said most large and medium size RFCs are well capitalised and profitable and are rebounding strongly although their recovery has been inhibited to some extent by reduced lending by banks.

But these conditions are expected to improve with the expansion of economic activities in the second half of the year.

A few small loss-making RFCs with lower capital levels need to build up their capital base to improve their viability,