The government’s planned solution to deal with the solvency challenges of 15 finance companies that are rumoured to be under stress by restricting banks from leasing vehicles to above Rs. 5 billion would be disastrous for business confidence and further diminish the country’s ability to attract investment from both local and international investors, an automotive industry analyst has warned.
Chief Executive Officer of Colombo-based JB Securities, Murtaza Jafferjee in a research note that such an intervention would also be diametrically opposite to the PM’s vision of a highly competitive social market economy that aims to improve consumer choice and increase contestability amongst producers.
“Going by the regulators thinking one must stop to ask the question as to whether these firms got into trouble due to competition from banks or their problems lie elsewhere. The stressed firms have been in trouble for many years, this is not a recent development. Although globally regulators use moral suasion to influence an outcome a far more egregious version of it – regulatory tyranny was used under the previous government to force healthy firms to take over stressed ones. Many of these forced buy outs happened at significant premiums to book value instead of at a discount creating a huge moral hazard – fail and you will be bailed out at a profit or worse fail to sell out at a profit,” Jafferjee said.
Pointing out that most investors look for a predictable policy environment, NOT tax holidays or concessions as some quarters believe, he noted that a far better intervention by the regulator is to increase the minimum capital requirement, which will force unviable firms to consolidate.
“There may be NO buyers for some, bankruptcy is the best option. Ending the life of an ailing patient is the best outcome when all hope is lost, keeping him going on life support is a terrible burden on him and his family – it similarly applies to a sick firm,” he said.
Jafferjee added that Non-Banking Financial Institutions (NBFIs) were far more profitable than banks as they recorded a better return on assets (ROA) ratio and Net Interest Margin (NIMs) in 2015. In 2015, the banking industry recorded a ROA of 1.3 percent and NIMs of 3.5 percent whilst the NBFIs recorded a ROA of 3 percent and NIMs of 8.7 percent.