New Central Bank regulations to increase minimum core capital levels for all licensed finance companies could spur small companies to improve their capital buffers and may reignite industry consolidation, Fitch Ratings said.
Fitch believes the new directive is likely to address the need for higher capital buffers for the non-bank financial institutions (NBFI) sector as a whole to ensure financial system stability, given our expectation of a deterioration in asset quality and capitalisation in the sector following aggressive loan book growth in recent years and persistent weak operating conditions.
The Central Bank directive in February 2017 requiring all licensed finance companies to increase their minimum core capital levels to Rs 2.5 billion by end-2020 in stages from the current Rs 400 million, with the first target of Rs 1 billion to be reached by January 1, 2018.
Capitalisation for the NBFI sector remains relatively low, with the core capital ratio at around 11.7% at end-September 2016. This level of capitalisation is similar to that of the banking sector, but we feel insufficient, as NBFIs have higher risk appetite than banks.
At end-September 2016, finance companies’ reported six-month NPLs accounted for 5.4% of total advances, compared with the three-month ratio of 2.9% for the banking sector. Fitch estimates that the ratio could be much higher for the finance companies at a three months level.
The new rules follow a previous plan to bring about financial sector consolidation, which did not significantly reduce the number of finance companies. There were 58 NBFIs covered by the “Master Plan for the Consolidation of the Financial Sector” in 2014-2015, some of which merged with larger finance companies or were acquired by banks. The sector currently comprises 46 licensed finance companies, of which the 20 largest ones assets as of end September 2016.
At end-September 2016, finance companies’ reported six-month NPLs accounted for 5.4% of total advances, compared with the three-month ratio of 2.9% for the banking sector. Fitch estimates that the ratio could be much higher for the finance companies at a three months level.
The new rules follow a previous plan to bring about financial sector consolidation, which did not significantly reduce the number of finance companies. There were 58 NBFIs covered by the “Master Plan for the Consolidation of the Financial Sector” in 2014-2015, some of which merged with larger finance companies or were acquired by banks. The sector currently comprises 46 licensed finance companies, of which the 20 largest ones assets as of end September 2016.
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