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A slew of new and tighter rules have been announced or already introduced for finance companies which, over the next two years, will have the impact of denting profits, boosting capital requirements and forcing better risk management practices. Rule changes include increased capital due gradually to the rise to Rs 2.5 billion by 2021. Another has introduced risk-weighted capital on top of a minimum capital requirement, similar to the BASEL rules applying to banks. Although this should make finance companies healthier - the industry’s smaller players are unenthused. They argue that the combined effect of the poor investment climate, low growth and lack of rural economic vitality will contribute to poor valuations for their businesses when trying to attract new capital. Following the introduction of a new accounting rule, IFRS 9 (the subject of our cover story), loan loss provisions at finance companies have risen by 70% on average, and may rise further. This has dented profits. For a sector where many of its 43 firms are struggling to meet new requirements, these are challenging times. Of course, they do have a path out and that is to merge among themselves. When two companies with poor valuations merge, none of the shareholders lose. The Central Bank, which is the regulator, also hopes the rule tightening will spur consolidation. It will be the best outcome for the sector.

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