Key reforms in consolidating NBFI sector comes under the spotlight

By Sanjeewa Bandaranayake

Non-Banking Financial Institutions (NBFI) sector has evolved over the past years to be a stronger force in the finance industry in Sri Lanka. Unfortunately, the public only remembers NBFIs in light of unethical practices of Non-regulated finance companies. But NBFIs account for many heart-touching, unsung narratives while working with less privileged people and this sector has empowered many with financial assistance and has assisted in eradicating poverty. It is the NBFI sector that has laid the foundation for many people to become entrepreneurs and that is why this sector is of utmost importance to the finance industry. There are two segments within NBFIs as regulated and non-regulated, and recent years saw a lot of issues and disputes related to Non-regulated finance companies which is one of the main reasons to emphasize on some essential reforms to consolidate the NBFI sector.

Reforms needed in the Consumer Credit Act

A key amendment is required in the Consumer Credit Act which currently allows both Non-regulated finance companies and Regulated Finance companies to carry out hire purchase services. This situation has led to a lot of issues over the past years, so enacting the proposed Money Lending and Microfinance Acts and making it unlawful for any person or institution to engage in lending activities without being registered under the proposed act, is the ultimate solution for these long-standing issues.

The need for viability of regulations for both customers and Finance companies

NBFIs specifically cater to the people at the bottom of the pyramid, SMEs and micro businesses, so there is huge risk involved within financial services. The accounting rules, legal framework and central bank regulations need to tally and be interconnected with each other without relying primarily on strict regulations. This means the regulations need to be impartial to both customers and Finance companies as well as focus on mitigating the risk to both parties.

Favorable environment for all NBFIs irrespective of size and assets

NBFI sector operating within the country are of large, medium and small sizes, but they all contribute to country’s economy at the end of the day. The present scenario offers an edge towards large finance companies over medium and small companies which needs to be addressed. Therefore a favorable environment needs to be created where all finance companies irrespective of size and location are able to thrive. These reforms will also contribute to the economic revival of the country in the long run.

Streamlining the grievance handling process

Every Finance company has a grievance handling process where customers can resolve their issues by discussing with the officer mandated with the process. This is a formal process and finance companies are bound to investigate the issues put forward by the customers. Customers can even complain to the CBSL if the finance company does not properly carry out the investigations. This process will help many and avoid any disappointment on the part of customer if it is well maintained.

Regionalizing the Financial Ombudsman services

Another suggestion is to regionalize the Financial Ombudsman service in order to handle the customer complaints and disputes. This service is currently available in Colombo and customers from outstations are deprived of it, so appointing Financial Ombudsmen to all other regions is of utmost importance for the Finance industry.  Financial Ombudsman is a person of high repute with experience in Banking and Financial Services. He is selected and appointed by a panel of representatives from the Central Bank, the Securities Exchange Commission, the Institute of Chartered Accountants, the Bar Association, the Organization of Professional Associations and a representative of the participating financial institutions.

Importance of a regulated environment

In case of an issue faced by a customer who obtains a service from a Non-regulated finance company, that customer has no power over the finance company, so the importance of a regulated environment yet again comes to the fore and it is highly important that people embrace the services of RFCs. If it is a regulated environment, even the CBSL can intervene and make sure that the customer’s issues are resolved. The above mentioned reforms will further strengthen the NBFI sector and allow the customers to obtain financial services with faith, in the comfort of a regulated and safer environment.

The writer is the Senior DGM – Operations at People’s Leasing & Finance PLC with 28 years of experience in the Finance industry.