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Banks’ Loss, RFCs’ Gain

  • 18% Credit Ceiling

A representative of one of the island’s smaller banks told this newspaper that they were nearing their 18% credit growth ceiling and expressed concerns that this would compel borrowers to seek funding from the more expensive registered finance companies (RFCs) which however have no such limits imposed.
RFCs unlike banks are not allowed to operate “no cost” current accounts; as such their only sources of liquidity are the dearer fixed deposits, savings accounts and bank borrowings.
As a result, the interest charged on borrowers by RFCs is higher than that which banks charge.
The source further alleged that there is a “borrowing-lending” mismatch among RFCs. “The tenures of their borrowings from our bank is short, generally for under a year, but their lending period is longer, sometimes as long as five years when it comes to lending on higher purchase terms,” he alleged.
Such a “borrowing-lending” mismatch,  in particular when an RFC borrows “short” and lends “long” may cause a liquidity crisis to such a lender as its payback period on a bank loan taken is shorter than the time it takes for such an RFC to recover such moneys borrowed from banks and re-lent to its customers. The possible repercussions of a liquidity crisis is that it may challenge the stability of such an RFC, and, if large enough, that instability may even pose a threat to the stability of that industry as a whole, with a possible repercussion to the banking industry itself.
The source further said that to prevent a possible risk, they only lend short term to RFCs. He also said that because deposits are not enough to meet RFCs lending needs; that compel them to borrow from banks to meet their liquidity requirements.
Meanwhile another source from one of the country’s larger commercial banks said that due to the alleged inherent risks involved, they don’t have any exposure in lending to RFCs. He further said that  because of their larger asset base (compared to smaller banks), coupled with the fact that they have the capacity to take up their lending to 23% through foreign borrowings as permitted by the regulator Central Bank of Sri Lanka (CBSL), they are yet to meet their credit limits as set forth by CBSL.
“But some of our peer banks have, and we find their customers now coming to us because of this,” he added.
The source further said that the two state banks have a larger lending capacity because of their much larger asset base. But the bogey here is that they are susceptible to large scale borrowings from the state which may result in them meeting their credit growth ceiling sooner than expected.
CBSL statistics showed that bank lending to government and state owned corporations as at July had increased by 24% year on year (YoY) to Rs. 964.9 billion.  Those statistics however do not denote who those bank lenders were.
CBSL, in order to ward of a potential balance of payments crisis in the economy has implemented a series of measures. Among those are limiting bank credit growth on a YoY basis to 18% with the exception that that percentage may be further uplifted by 5% provided the additional funding comes from foreign sources, giving greater flexibility to the ER, increasing policy rates, vehicle import taxes, raising administered energy prices and hiking the administered prices of milk powder, wheat flour, bread, cement and bus fares.

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