TFC to strike merger deal with a state bank

By Bandula Sirimanna

First finance company to respond to new Central Bank rules

Battling in a difficult financial and negative net-worth situation, the Finance Company Plc (TFC) is close to striking a merger deal with a state bank in accordance with new Central Bank (CB) rules aimed at consolidating the non-banking financial sector, official sources said.

TFC is the very first Non Banking Financial Institution (NBFI) to identify a partner to merge to reach the stipulated Rs. 8 billion in assets and capital of Rs. 1 billion.

The top management of the bank held a discussion with CB authorities on Friday, January 17th to explore the possibility of merging the company with the State Mortgage and Investment Bank (SMIB), the sources said.

The regulatory process will commence shortly after the handing over of the merger plan by TFC to the CB before the March 31st deadline.

However Kamal J. Yatawara, Director/CEO of the company and former President Finance Houses Association of Sri Lanka told the Business Times that three financial institutions have stepped into merger talks with the TFC and the final decision would be conveyed to Colombo Stock Exchange in accordance with listing regulations and before that he was unable to name the institution earmarked for the possible merger.

Provided the regulatory review concludes positively the newly-merged integrated company is expected to provide financial services including business loans, housing loans, leasing, hire purchase, trade finance, foreign currency exchange, foreign remittances, fixed deposits, savings and pawning for customers and new innovative financial products, he revealed.

He said the CB took timely action to consolidate the 58 non-bank financial institutions into 20 larger ones, as most of the NBFIs were struggling to survive as a result of losing confidence on finance companies, with the recent collapse of CIFL. On top of it banks were reluctant to lend to non-bank lenders such as TFC and the interest rate was also high, he said, adding that this made them difficult to survive.

TFC is the country’s oldest finance company and its CEO was hopeful that its “unparalleled” branch network strategically located countrywide and the merger of the company with a strategic partner will help (TFC) bounce back on a platform of efficiency and customer service.

The company is carrying accumulated losses of Rs.6 to 8 billion with total liabilities of Rs.6.6 billion over total assets. Mr. Yatawara said the company has been able to reduce 60 per cent of the accumulated losses amounting Rs. 12 .8 billion.

“The negative impact created by a share transaction of the company during the early part of the year under review hampered the planned growth in the deposits, loan disbursements and real estate sector,” he pointed out.

Commenting on the CB’s plan to merge NBFIs, economic expert and MP Dr. Harsha de Silva told a gathering of disgruntled CIFL depositors who were at a Sathyagraha campaign demanding the repayment of their deposits, that there was a move to merge TFC with a state bank.

Such mergers will only allow the owners and the directors of questionable companies to get away but there will not be any redress for poor depositors.

He said that he has brought to the notice of parliament that troubled finance companies are headed by people with strong links to the Government, raising more questions over the CB’s newly-unveiled plans.

He noted when shares of TFC were bought at Rs. 50 through the National Savings Bank inflating the market rate of Rs. 30. Today the share price has gone below Rs. 10.

Under this set up now the CB is matchmaking to link the loss making TFC with a state bank, he revealed.

The company has not met any regulatory requirements of the CB and losses have grown over the last few years even when it was under the CB restructuring process, even with hand picked directors, he said adding that all these details were disclosed in parliament by him.

People’s Leasing discussing mergers

The People’s Leasing Company (PLC) has begun discussions with some four finance companies to acquire them, PLC officials said.

“They have approached us and we’re talking to them,” a senior official told the Business Times.

The official added that they may also wrap up a deal involving a big finance company and another company where one will purchase a small finance company’s assets and the other will buy its infrastructure.
(Duruthu)

http://www.sundaytimes.lk/140126/business-times/tfc-to-strike-merger-deal-with-a-state-bank-80866.html

Bank consolidation – what’s the cost?

by R.M.B Senanayake

The Governor of the Central Bank has published a blueprint for the consolidation of banks and finance companies through mergers or acquisitions of weaker institutions by the stronger ones to reduce the number of financial institutions. This stems from the realization that a few banks and a larger number of finance companies are weak and vulnerable to a run by depositors. There may be a case for amalgamating the weak with the strong but there is no free lunch. The weaker institutions that are merged will have to be re-structured and bad assets would have to be written down in value. Who will bear the consequential losses? It won’t be the public. So the decision will have to be left to each institution.

But what if the strong do not want to amalgamate with the weaker or the weaker is unwilling to amalgamate? Will the big stick be used then? This is the danger - that the banks will become politicized just like the rest of the society.  The State cannot become efficient unless and until it is manned not by placemen and political henchmen but by a meritocracy. Hitherto the bank managers have been drawn from persons who have grown and developed in the banking system itself. There is a danger that with greater control over the banks by the authorities the professional banker will be displaced.

Too many banks and finance companies ?

With the introduction of economic liberalization in 1977, the banking sector got the opportunity to expand, grow, add new facilities and introduce modern technology in banking. Even then, the late N.U Jayewardene had to face obstruction by the authorities when he sought to establish the Sampath Bank. But competition in banking increased with the setting up of new banks. Unfortunately the newer banks followed the same business model inherited from the days of the colonial period exchange banks. They concentrated on the towns and sought to make profits from foreign exchange business catering to trade finance. The authorities also issued licenses to open finance companies. But little attention was paid to the capital and prudential regulatory requirements. Leverage was unregulated and persons of dubious character came to be appointed as chairmen and directors of finance companies without consideration of the finance mobilized by them. The viability level of these institutions and the capacity of the regulating agency to monitor these institutions were not given enough consideration. Some directors of finance companies have committed frauds and siphoned away funds from the company to their private accounts or bought illiquid assets which cannot be disposed of in the event of a liquidity shortage.

The results are now to be seen. Majorities of bank and financial institution are city centered. The activities like opening of branches at rural setting, developing entrepreneurs and thereby increase employment opportunities, productivity level and earning of the country did not occur as expected. Lending activities concentrated on the consumption sector which has influenced luxury imports and vehicle imports. So there is a case for having fewer and stronger finance companies.

But there is less of a case for reducing the number of banks for that would reduce competition. It is useful for the Central Bank to guide banks and finance companies to merge. All this is being done because of danger signals ahead particularly for finance companies. The parallel drawn is with regard to the financial crisis of 2007-2009 in USA and Europe caused by imprudent lending by the financial sector.

Causes of financial crisis in the West

Niall Ferguson, the well known academic, dealt with the financial crisis in the Reid lecture for 2013.He argued that the financial crisis was not due to over-regulation as made out by some. Nor was it entirely due to the liberalization of the regulations by the removal of the ban on combining deposit banking with investment banking. Firstly he said that the Basel Committee on Banking Supervision’s 1988 Accord allowed very large quantities of assets to be held by banks relative to their capital, provided these assets were classified as low risk. Risk weighting was left to the judgment of the bankers. So there was excessive leverage which is prevalent in some of our finance companies where the loans and advances (assets) have far exceeded the capital several times.

Secondly, he says that from 1996 the Basel rules were modified to allow firms effectively to set their own capital requirements on the basis of their internal risk estimates. In practice, risk weightings came to be based on the ratings given to securities – and later to structured financial products – by the private rating agencies. They were not always objective and could be influenced.

Niall Ferguson says "It is more than a little convenient for America’s political class to have the crisis blamed on deregulation and the resulting excesses of bankers. Not only does that neatly pass the buck. It also creates a justification for more regulation. But who regulates the regulators?

Regulatory bodies can be captured by those whom they are supposed to be regulating; not least by the prospect of well-paid jobs should the gamekeepers turn poachers. They can also be captured in other ways – for example, by their reliance on the entities they regulate for the very data they need to do their work.

So there is a risk that we may have too much influence by the regulatory authority. The regulatory authorities cannot avoid succumbing to political influence. We saw what happened to the Bank of Ceylon and the People’s Bank. The latter became ‘some peoplebank’ and the former has come to be the bank of the Treasury and the public sector institutions.

Niall Ferguson referred to Walter Bagehot’s "Lombard Street" published in 1873. Bagehot, the editor of the Economist, described with great skill the way in which the City of London had evolved in his time. He understood that the British financial system was complex and fragile.

Bagehot’s famous recommendation was that in a crisis the central bank should lend freely at a penalty rate: "Very large loans at very high rates are the best remedy …"

Nowadays says Ferguson,   we follow only the first half of his advice, in the belief that our system is so leveraged that high rates would kill it. This same sentiment seems to drive the Central Bank’s low interest rate policy. Bagehot’s rationale was to the greatest number of applications by persons who do not require it".

Bagehot said "credit is an opinion generated by circumstances and varying with those circumstances. The state of credit … can only be known by trial and inquiry. And in the same way, nothing can tell us what amount of ‘reserve’ will create a diffused confidence; on such a subject there is no way of arriving at a just conclusion except by incessantly watching the public mind, and seeing at each juncture how it is affected"

So Bagehot recommended that merchants be allowed on the Boards of the banks. "Steady merchants," he wrote, "always know the questionable standing of dangerous persons; they are quick to note the smallest signs of corrupt transactions". Our bank directors are not drawn from merchants but from professionals like Chartered Accountant or lawyers. This trend will be aggravated if they are replaced by politically affiliated men which is likely if the regulatory authorities get too much power over the appointments of bank directors.

Bagehot also made the following point that the rule that "the Bank of England should look to the market rate and make its own rate conform to that … was … always erroneous". The "first duty" of the Bank was to use the discount rate to "protect the ultimate cash of the country". In today’s context in our country it would refer to the Official Foreign Exchange Reserves.

Niall Ferguson made another point which is very relevant for our Non –bank Financial sector -the finance companies. He said that "we must ensure that those who fall foul of the regulatory authority pay dearly for their transgressions. Those who believe this crisis was caused by deregulation have misunderstood the problem in more than one way. Not only was misconceived regulation a large part of the reason. There was also the feeling of impunity that came not from deregulation but from non-punishment". There is evidence that directors of finance companies have committed fraud but no criminal charges have been brought against them. Even the Golden Key magnates have got off lightly. Only Sakvithi has been imprisoned. The audit firms auditing the finance companies have failed to point out whether the company is a going concern or not. None of them have been prosecuted. It is possible that the Police lack the knowledge and understanding to deal with white collar crime. So a separate Investigation Unit should be set up to inquire into crimes in companies. Greedy people will only commit fraud or be negligent if they feel that their misdemeanor is unlikely to be noticed or severely punished. The failure to apply the law is one of the most troubling aspects of the past five years. N.U Jayawardene introduced parate execution power for banks to change the culture of debt default. But instead of extending it to finance companies, the Judiciary eroded it by judicial activism.

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