Rajiv Gunawardena reviews the role of non-banking financial institutions

Compiled by Yamini Sequeira

Q: What is the state of play of the non-banking financial institution (NBFI) sector in the prevailing environment?
A: The sector is being cautious about expanding its loan book. Fortunately, it has been able to maintain healthy cash flows despite over 30 percent of the loan book falling under the Central Bank of Sri Lanka’s (CBSL) debt moratoriums.

Furthermore, the sector has benefitted from lower funding costs and has in turn extended the benefits thereof to customers during this period. The cumulative capital of the NBFI sector has also seen an improvement as a result of CBSL’s initiatives to strengthen it further.

Q: Could you describe the most telling impact on the sector?
A: The pandemic has been difficult for most people as their livelihoods have been drastically affected by government restrictions and regulations.

This has impacted their incomes and as a result, there’s been an increase in the delinquency ratio of loan books. The sector has found it challenging to grow its loan book in comparison to the pre-pandemic era.

Q: So what are the main challenges to look out for?
A: CBSL’s policy to strengthen capital structures and set up a strong governance framework will enable the sector to face the challenges that lie ahead. It is important that financial institutions take the necessary steps to support the revival of the economy.

So our key challenge will be to assist customers and guide them towards achieving financial stability. However, the growth of loan portfolios will be an obstacle for us, and we will need to refocus product lines to cater to the growing demands of new industries and sectors in line with government policy.

Q: And what should the key strategies to drive the sector entail?
A: Customer reach has been a challenge ever since the COVID-19 outbreak. As a result, we will continue to focus on digitalisation, as well as improving the efficiency and effectiveness of delivery channels.

Flexibility and adaptability will be the main areas of focus when formulating strategies in the sector considering that the post-pandemic era will be a first for all of us.

Q: In your assessment, what are the strengths and weaknesses of the NBFI sector?
A: Under the guidance of the regulator, the sector has been going through a period of consolidation and strengthening the fundamentals of its operations. As a result, we are in a better position to face challenges that loom on the horizon.

NBFIs have always been a stepping stone for most customers in terms of financial inclusion. Our contribution isn’t limited to the extension of loans and management of financial assets; it also includes the introduction of grassroots level people to formal financial systems.

This paves the way for lower borrowing costs, opportunities to save and other services offered by financial systems. More importantly, it distances them from unregulated borrowing systems, which are expensive and detrimental.

It follows that our contribution to the economy shouldn’t be highlighted only in terms of quantitative factors – the aforementioned reasons must also be taken into consideration when evaluating the importance and value of the NBFI sector.

Q: Can the reliance on vehicle financing be eased? And if so, how?
A: There is high exposure to the leasing sector. Due to the restrictions on vehicle imports, prices have increased but one of our largest market segments has stagnated because of this.

While price appreciation benefits existing lease portfolios, the inability to further grow this loan book is an area of concern. However, since the objective of NBFIs is to serve the public irrespective of the nature of collateral, steps have been taken to introduce alternative products such as gold and real estate financing.

Q: And what would the long-term impact of the pandemic be on the sector?
A: The impact of the pandemic is new to every industry and no business model had been put to the test prior to COVID-19.

Therefore, while it’s difficult to make predictions about the long-term impact of the pandemic on businesses, I believe that NBFIs have performed better than anticipated since the outbreak of COVID-19 early last year.

Having said that, the impact of debt moratoriums – not to mention the long-term effects on the economy – needs to be quantified. This will identify the longer-term impact on the sector.

Q: Do you think there will be greater consolidation going forward?
A: This is a decision for the regulator. However, CBSL’s master plan has benefitted the sector in terms of strengthening capital structures and the governance framework.

While acknowledging the benefits of the consolidation plan therefore, we also have to understand that the need for financing will continue to be in demand. Meanwhile, having a viable number of NBFIs will benefit economic development and create healthy competition.

Q: How does the future of the sector appear to you?
A: It will continue to contribute to the development and growth of the economy, subsequently improving people’s livelihoods. Overall, the NBFI sector will always play an important role in strengthening the national economy.

The interviewee is the Chief Executive Officer and a Director of Asia Asset Finance