NBFIs need strong regulatory system to overcome crisis

Loan burdened and liquidity trapped non-banking financial institutions (NBFI) are facing a dire situation and as per expert views even widespread loan scheduling will not salvage almost half of such financial institutions now passing through crisis.  
After taking decision to appoint a liquidator in People's Leasing and Financial Services (PLFS) the real scenario in other NBFIs also started to come to the light. On investigation by Bangladesh Bank at least three more such financial institutions were found in red zone.
The financial situation in the NBFIs further deteriorated ever since the revelation of the severe liquidity crisis in those institutions further aggravated by drying of their funding by over cautious banks on fear of risks.
Muzaffar Ahmed, Chairman of the Credit Rating Information Services said for transparency and bringing order among the NBFIs it is imperative to enact new law with strict regulations and monitoring mechanism to run those financial institutions.
He said the financial health of at least one-third of the NBFIs is not good as they are not getting funds from banks and depositors. He said once a new act can be framed to ensure better management and accountability the NBFI may revive from existing setback.
He said poor regulatory system paved the way for robbing and imprudent lending by the NBFIs, which are now shouldering a huge accumulation of bad loan coupled with a tendency of becoming defaulters against bank credits.
As per existing regulatory guidelines, non banking deposit collecting institutions have to maintain five per cent liquid assets, including 2.5 per cent cash of total deposits, as per regulatory guidelines. Apart from that the financial institutions will have to pay one per cent fine on everyday's shortage as per the rule.
But as per BB statistics many NBFIs are failing to maintain such level and even failing to pay back the depositors' money. The revelation of PLFS opened the vulnerability of the entire NBFI situation precipitating the crisis.  
PLFS loans and advances stood at Tk11.31 billion as of December 31 last year, which was 56 per cent of total deposit of Tk20.44 billion and the central bank found that 66.14 per cent of the loans and advances (Tk7.48 billion) as bas loan.
NBFIs largely depend on banks for sourcing finance while a small portion of investable funds come from individual depositors.  But after appointing liquidator to PLFS banks have largely stopped funding non-banking financial institutions. It has aggravated their liquidity crisis.
Bangladesh Bank's annual report on Banks and NBFIs shows the numbers of ailing financial institution are too many.  Prime Finance and Investment   Limited, Fareast Finance and Investment Limited, Bay Leasing and Investment Limited, Premier Leasing and Finance Limited, Reliance Finance Limited, Union Capital Limited, FAS Finance & Investment Limited, First Finance Limited, International Leasing and Financial Services Limited (ILFSL), besides PLFS.
Bangladesh Industrial Finance Company Limited (BIFC) topped the list. They will haunt the stability of the financial system  for long, experts said.