What are the central bank regulations relating to finance companies?

The Central Bank has established several regulations relating to finance companies, as outlined in the provided context. Here are the key points:

  1. Licensing Requirements:
    • Finance companies must be registered as a Public Company at the Registrar of Companies.
    • They must have a Core Capital of not less than Rs. 2.5 billion, as determined by the Central Bank of Sri Lanka (CBSL).
    • They must be able to comply with the directions and rules applicable to finance companies.
    • An application must be submitted to the CBSL as provided in the Finance Business Act (Application) Rule No. 01 of 2012.
  2. Legislation and Amendments:
    • The Finance Business Act, No. 42 of 2011, and the Finance Leasing Act, No. 56 of 2000, are in the process of being amended to strengthen and align the regulatory framework with that of licensed banks.
    • New legislation such as the Financial Assets Management Act and Micro Finance and Credit Regulatory Act is being drafted.
  3. Consumer Protection:
    • A comprehensive set of new regulations was developed by the Central Bank to introduce an integrated financial consumer protection framework for entities regulated by the Central Bank.
    • These regulations define specific regulatory powers for supervisors to facilitate market conduct supervision and provide clarity to both service providers and recipients on the areas to be considered in delivering or obtaining financial services.
    • The final regulations are expected to be effective in mid-2023.
  4. Unauthorized Financial Institutions:
    • The Finance Business Act No. 42 of 2011 makes it an offense to conduct finance business and accept deposits without a license from the CBSL.
    • No person other than a person licensed under this Act or exempted from its provisions is allowed to carry on finance business or accept deposits.
  5. Capital Requirements:
    • A minimum core capital requirement was introduced for Licensed Finance Companies (LFCs) in 2017 to encourage consolidation and enhance the safety and soundness of the sector.
  6. Prudential Limits:
    • The Central Bank is formulating Directions that stipulate prudential limits for large exposures that banks can have vis-à-vis single borrowers and to a group of connected borrowers, including State-Owned Business Enterprises (SOBEs).

These regulations and legislative amendments are part of the Central Bank’s efforts to ensure the stability and resilience of the financial sector, protect consumers, and align with international standards.