Compiled by Tamara Rebeira

FINANCING THE VULNERABLE

Cecil Perera expounds the NBFI sector’s role in the national economy

Q: How do non-banking financial institutions (NBFIs) contribute to Sri Lanka’s development?

A: NBFIs mainly cater to customer segments that are unable to receive funding through traditional banking systems mainly due to stringent evaluations, a lack of adequate documentation and so on.

Speedy services contribute to its growth and the sector’s loan book stands at Rs. 1,150 trillion.

NBFIs operate in every nook and corner without value restrictions or boundaries on the profiles of their financial products. The sector promptly responds to requests for financing facilities and converts them into business.

As a result, NBFIs have penetrated vulnerable and needy sectors by empowering women in the rural economy, developing entrepreneurship among talented people, offering convenient finance facilities, and replacing informal money lenders and NGOs.

Q: What are the major challenges faced by local NBFIs?

A: The main source of NBFI funding is high cost borrowings from banks and customer deposits. As such, the cost of operations is comparatively higher than banks, which are the main competitors.

This pushes well-established and prime customers towards banks, leaving the most vulnerable segments to NBFIs. Therefore, the sector takes greater credit risks, leading to the prospect of delinquency. Though it takes risks however, the sector almost falls in line with banks in terms of compliance with regulators.

Recent unexpected economic changes made some viable financial products for financing an income earning asset (e.g. three-wheelers) unviable and loss making, impacting NBFIs’ profits and liquidity.

So the challenge today is to turn such pro­ducts into viable assets with improving economic conditions.

The task of assisting customers in resurrecting businesses by restructuring facilities falls on NBFIs as such individuals aren’t entertained by banks and other financial institutions due to being blacklisted by the Credit Information Bureau of Sri Lanka (CRIB).

Another challenge is mitigating the funding mismatch issue in the NBFI sector, which was aggravated by the sudden increase in deposit interest rates.

The lack of business opportunities is an issue for banks and larger NBFIs. This poses a challenge for smaller NBFIs if these institutions tread on their business by offering low interest rates.

Q: Does the sector address sustainabi­lity concerns?

A: Funding for renewable energy aligns with sustainable financing. NBFIs offer financial products to users of renewable energy and related service providers, and will bring efficiency into their processes through digitalisation.

As such, the sector will change its operational methodology and processes to use advanced communication technology for marketing, appraisals, followups and debt collection activities. This will eliminate unnecessary paperwork, costly labour and travel.

Q: So what differentiates NBFIs from other financial institutions, in your opinion?

A: NBFIs are subject to more regulatory guidelines compared to other sectors.

Banks can operate current accounts so they have certain liquidity balances without direct costs. Furthermore, banks have evolved over the years with larger capital bases.

There are other unregistered and unregulated operators offering financial products in competition with NBFIs as well.

Q: How do you see the sector evolving in Sri Lanka?

A: NBFIs will introduce more digitalisation efforts and facilitate finance requirements mainly at the grassroots level. They are also flexible and adapt to changes, and will cater to the financial requirements of all sectors with a mix of products.

Q: What role can NBFIs play in revitalising Sri Lanka’s battered economy?

A: Out of the box thinking is required in credit assessments – instead of conservative thinking.

Revised cash flows must be taken into account based on the post-pandemic economic revival. Based on this, NBFIs can support customers by rescheduling and restructuring existing facilities. Extending facility periods and capitalising on the sustainability of accumulated ren­tal arrears are part of this exercise.

Additional breathing space for repayments can also be offered to those in delinquent situations due to economic reasons. Staff training and education is also vital to understand different situations.

Q: And what strategies should the sector employ to navigate the economic crisis?

A: NBFIs must aggressively seek new business opportunities and finance the expansion of existing businesses, while assisting existing customers to uplift and strengthen their operations.

Institutions will have to revisit credit policies to suit the current context.

They must also introduce efficiency and innovation to their operations by evaluating past data, and conducting research on potential business sectors and geographical locations – and share this knowledge with customers.

NBFIs can also look at emerging sectors that displayed growth during the economic crisis – e.g. tourism, industry, agriculture, IT, local and foreign education, and foreign employment among others.

These institutions should also revisit greater risk portfolios depending on their ability to cater to them.

The interviewee is the Chairman of Abans Finance.