ECONOMYNEXT - Sri Lanka is looking to tighten oversight and governance of small lenders and not eliminate them through consolidation with larger entities, Central Bank Governor Arjuna Mahendran said.
Though consolidation into larger entities which were more stable would make the system safer for depositors large banks sometimes did not have the focus to lend to micro-borrowers, he said.
Mahendran was speaking at 'Advancing Asia' an economic conference in Delhi hosted by the International Monetary Fund and India.
Sri Lanka was still allowing smaller non-bank lenders to raise deposits, while countries like Thailand had banned the practice he said.
In Sri Lanka so-called finance companies, give higher rates for depositors but also lend to more risky or 'sub-prime' customers. They get into trouble mostly due to real estate finance, when bubbles fired by the central bank collapse.
There were two major waves of sub-prime lender failures in Sri Lanka in the late 1980s and in 2008/2009.
But typically the better managed finance companies have higher capital buffers of around 15 percent or more.
Sri Lanka was also looking to ease foreign finance to enter the micro-finance sector, he said.
There has been some opposition from leftist elements in the country to foreign capital entering micro-finance where interest rates were high, but a law was being planned to cover foreign financing to enter micro-lending, he said.
Over the past five years, private lenders have also started to directly borrow from state-backed development lenders in Europe to on-lend domestically.
Mahendran said that interventionist lending had succeeded when market imperfections kept small borrowers out of the banking system.
Sri Lanka's finance ministry has a three decade history of borrowing dollars from multilateral agencies and on-lending in domestic currency to banks to finance small and medium enterprises (SMEs) as well as micro lending.
The central bank itself had a program at one time for 'landless farmers' where a revolving credit fund, backed with foreign finance was used in a micro-finance scheme.
In the 1980s the monetary authority used central bank credit (printed money) to refinance rural credit generating high inflation around or higher than 20 percent a year and generating currency collapses and balance of payments troubles.
As money printing and deficit spending pushed interest rates towards 20 percent for all borrowers, the government borrowed from the World Bank and Asian Development Bank for 'subsidized' credit to SMEs at around 12 percent.
In recent years that have been growing calls for the central bank to improve monetary policy and for the state to cut its budget deficit so that inflation and interest rates would come down and people - both rich and the poor - can be freed from high inflation, high interest rates and poverty.
Sri Lanka's high inflation started to fall from 1995 after it stopped rural credit re-finance and reduced debt monetization, but BOP problems continued sporadically. (New Delhi/March 14/2016)