CB liquidity scheme for troubled finance companies

Acknowledging openly that there is a liquidity issue with Sri Lanka’s bloated finance sector, the Central Bank on Saturday said it would provide liquidity to any troubled finance company with immediate effect.

Accordingly, the Central Bank, which is entrusted with the responsibility of maintaining the country’s financial system stability said, it has decided to implement a Liquidity Support Scheme (LSS) for any licensed finance company faced with liquidity constraints, to revive and restructure operations.

The liquidity support would be provided via the Sri Lanka Deposit Insurance Fund (SLDIF), and would be granted on a caseby-case basis, after an assessment of the liquidity position of the particular licensed finance company by the financial regulator

he Bank also said, in tandem with the LSS, it may direct the existing shareholders of troubled licensed finance companies to infuse fresh capital or invite a strategic investor to make an investment. In other instances, the Central Bank may also direct depositors to convert a part of their deposits to shares.

In order to obtain facilities under the scheme, a licensed finance company is required to submit an acceptable business restructuring plan to the Central Bank and also meet its term and conditions.

These conditions will include restrictions of transactions with related parties, curtailment of remuneration and incentive payments to the board of directors and key management personnel, reduction of administrative costs, furnishing of acceptable collateral, and submission of periodic reports on the progress of the implementation of the restructuring plan.

As at July 1, 2013, there were 47 finance companies operating in Sri Lanka—perhaps a too bigger number for a country of the size of 65, 000 square kilometers with a strong banking sector.

Central Bank has a separate division called the Supervision of Non-Bank Financial Institutions Department to monitor and audit the operations of these licensed finance companies.

 However questions have been asked about manpower of the department to monitor all these companies on a regular basis.

The dust has not yet settled on the collapse of several licensed and unlicensed finance companies of the Ceylinco group and of Sakvithi Ranasinghe, that duped people of their savings and made them destitute. Some of Ceylinco group companies which were revived under new owners are still struggling, and the conversion of deposits to shares have given little solace to depositors as the value of such shares in the market have crumbled.