CB implements extraordinary regulatory measures to pump in more liquidity to banks

• Measures implemented to ensure continued supply of credit and meet urgent liquidity needs
• Urges banks to provide uninterrupted credit flows in a prudent manner to revive economic activities 

The Central Bank (CB) yesterday announced the implementation of extraordinary regulatory measures aimed at strengthening the liquidity positions of the licensed banks, to ensure the continued supply of credit and to meet the urgent liquidity needs of banks, given the current position of the industry.

The extraordinary regulatory measures are extended under the provisions of the Banking Act and Monetary Law Act by the Monetary Board of the Central Bank.

Aiming at spurring demand in the economy, the first measure is to provide additional funding under the refinance facility or other credit operations, enabling the banking sector to provide working capital and other loans at concessionary rates of interest.

The second measure implemented is, up to June 30, 2021, the CB would permit the licensed banks to consider certain assets as liquid assets in the computation of the Statutory Liquid Assets Ratio (SLAR), subject to conditions. 

The regulator would also reduce the minimum requirement of Liquidity Coverage Ratio and Net Stable Funding Ratio to 90 percent, with enhanced supervision and frequent reporting. 

Under the third extraordinary measure, the CB would enable the licensed banks to avail liquidity through the Sri Lanka Deposit Insurance and Liquidity Support Scheme or as loans and advances in rupees under the Framework of Emergency Loans and Advances to Licensed Banks. This would be based on acceptable collateral and liquidity forecasts. 

According to the CB, the extraordinary measures are being implemented after having acknowledged the possible adverse impact on liquidity and other key performance indicators of the licensed banks, due to the implementation of the credit support scheme to assist COVID-19-hit businesses and individuals.

Furthermore, in an effort towards strengthening the liquidity position of banks under these exceptional circumstances, the CB said it has decided to restrict certain discretionary payments of licensed banks.

Such include—declaring cash dividends or repatriation of profits, engaging in share buy backs, increasing management allowances and payments to the board of directors for a limited period until December 31, 2020. 
“Banks are required to exercise prudence and refrain to the extent possible when incurring non-essential and capital expenditure during the above-mentioned period,” the CB cautioned.

Meanwhile, considering the resource constraints currently faced by the banks and the prevailing market conditions due to the COVID-19 outbreak, the Monetary Board has also decided to waive the annual assessment of Domestic Systemically Important Banks (D-SIBs) for the year 2020 and maintain the already designated D-SIBs as published in December 2019, for the year 2020 as well. 

“Boards of directors and the senior management of licensed banks are strongly advised to closely monitor the liquidity positions of the respective banks and use liquid funds accruing as a result of these extraordinary measures prudently for intended purposes,” the CB said.

The regulator stressed that through these extraordinary measures, it is expected from the banks to provide uninterrupted credit flows in a prudent manner to revive economic activities, where in turn all sectors, including the financial sector of the economy, will benefit.