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The “Younet” and “Backing” affair, two non-banking companies revealed what everyone feared. Corporate governance in non-banking companies. The credit rating company Madrog is aware of the problems in these companies and hence today issued an industry warning that those who are well versed in it understand what everyone knows – the risks in these companies are too high.
If so, what did we find out about the non-banking industry in the case of “Yount” and “Backing”. The corporate governance in these companies is too flexible. That is, the processes in which their credit is approved is not sufficiently regulated and the procedure among the risks is also incomplete. That is, it is not supervised or regulated, and this is due to the laxity of the regulator that is supposed to supervise these things – the supervisor of the capital and insurance market.
More in-
Let’s explain for a moment what we mean by the regulation of the industry. In principle, any non-bank credit company that does not accept deposits is supervised by the supervision of the capital market and insurance. It does not monitor their stability but is supposed to monitor proper corporate governance processes that take place there. In other words, each company can determine for itself the boundaries of the field it wants to play there, but these should be anchored in clear, transparent rules, etc., so that situations do not arise, as in Vinot’s backing, in which loans that were given not according to reasonable corporate governance rules are suddenly discovered, thereby undermining the stability these companies.
As mentioned, Medrog issued an industry warning that includes exactly these things. In recent years, the non-bank financing industry has undergone a regulatory process that included the enactment of an appropriate law within which an overall framework was established for the regulation of the market, including a regulatory regime for the entities operating in the industry, which is supervised by the Insurance and Savings Capital Market Authority.
“In May 2022, the Capital Markets Authority distributed a circular concerning “Risk Management at a Regulated Financial Services Provider” and whose purpose is to guide the financial services provider in adopting risk management procedures that will help it deal effectively with the various risks to which it is exposed or may be exposed, by formulating a policy and work processes for risk management, appointing a risk manager, allocating resources for risk management and establishing reporting routines in risk management, etc. The applicability of the provisions of this circular for entities licensed to provide credit is in December 2023.
“Increasing the licensing and supervision requirements in the industry has a positive effect on the field of activity and the status of the companies in it, this, among other things, in light of the expectation that these requirements will lead to the stabilization and strengthening of the companies operating in the industry, including increasing transparency and improving the ways of conducting business in it.
“Midrog believes that at this stage, the dedicated regulation for companies operating in the non-bank financing industry does not outline clear guidelines for the conduct of corporate governance, the levels of required controls and the uniformity of reports. It also recently defined an outline for regulating the regulatory framework regarding the management of the various risks and exposures.
“This is in contrast to other financial entities such as banks, insurance companies, investment houses and credit card companies in which the dedicated regulation outlines the manner of risk management, clearly defines the role of corporate governance and the level of reporting in those entities. Therefore, Midrog believes that there is no significant indication in this regard The internal controls of the issuers operating in the industry, and this in addition to the lack of significant control and supervision on the part of the regulators” write Madroog economists.
Medrog writes that in the recent period there have been a number of events that point to weaknesses in corporate governance in companies in the industry, which are a key credit consideration. “Weaknesses in corporate governance may lead to a deterioration in the creditworthiness of financing companies mainly due to a significant erosion in the quality of the credit portfolio, profitability, ability to recover income, liquidity and accessibility For funding sources, additional costs, legal and regulatory, etc.
Regarding the operation of the Securities Authority in the non-banking companies, Midrog says that “Midrog believes that the audit and evaluation activity is an important tool in the supervisory toolbox and it allows for an in-depth examination of the manner of compliance of supervised entities with the provisions of the law and the regulation rules that apply to them, thus potentially increasing the deterrence and level The compliance of the supervisors. Also, to the extent that findings emerge from this audit, improvements may be made in the reporting and disclosure of risks in the companies operating in the industry, which will increase comparability over time.
“At the same time, Midrog is monitoring the consequences on the financial statements of the issuers as a result of this audit, and the disclosure requirements, which in the short term, may flood gaps and corrections in the comparison numbers. Midrog will monitor and examine in detail the changes and their consequences as they arise.”
In conclusion, we will try to explain what is said in the rating in a “washed” language. Due to the laxity of the dedicated regulator for the industry, the Securities Authority entered the worlds of supervision of non-bank credit companies (recall that they are public and raise money not only from the banking system but also from the bond market – from the public) and there it requests greater transparency so that investors can manage their risks when they enter Or considering their entry into investing in these companies.
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