CB extends further relief to finance companies on liquid assets

Central Bank has extended the relief measures afforded to licensed finance companies on mandatory liquidity standards by a further 3 months through June 30, 2021 to ride the pandemic-induced business challenges, after the earlier extension lapsed on March 31, 2021. 

In a fresh amendment to the Direction on liquid assets of licensed finance companies issued last week, the Monetary Board extended the minimum reduced mandatory liquid asset requirement of 6 percent on the outstanding value of the time deposits and the face value of non-transferable certificates of deposits issued and the accrued interests payable thereof at the close of a business day. 

Meanwhile, the same requirement for savings deposits was 10 percent from April 01, 2021 to June 30, 2021. 
The original requirement as stated in the Finance Companies (Liquid Assets) Direction No. 4 of 2013 is 10 percent for time deposits and the face value of non-transferable certificates of deposits issued and accrued interests payable, while it is 15 percent for the savings deposits.

Apart from the liquid assets maintained on deposits, finance companies are also required to maintain a minimum of 5 percent of the total outstanding borrowings and other payables that may be determined by the Director of Non-Bank Supervision. 

The original requirement was 10 percent applicable till March 31, 2020. 
But at the onset of the pandemic on March 31, 2020, the Monetary Board brought down the two requirements to the current levels in view of the challenging business conditions triggered by the pandemic. 

Due to the prolonged difficulties that came out of the pandemic, the Monetary Board extended this eased liquid asset requirement for the second time on October 1, 2020 for a further 6 months, which lapsed on Wednesday March 31, 2021. 

“The Monetary Board hereby issues following amendments to the Direction on liquid assets of Licensed Finance Companies (LFCs), considering the challenging operating environment due to the prolonged impact of the second wave of the COVID-19 pandemic,” the Central Bank said.

The lower mandatory liquid asset requirement leaves more funds for finance companies, which otherwise remain locked-in in government securities at nominal rates, for lending and other investments which yield higher rates than treasury bills and bonds. 

However, the earlier requirement of a mandatory 7.5 percent of such assets be maintained on government securities such as treasury bills, treasury bonds, Sri Lanka Development Bonds and international sovereign bonds and any other securities issued by the Central Bank, has now been reduced to “5 percent of the average of its month end total deposit liabilities and borrowings of the twelve months of the preceding financial year”. 

Lower liquid asset requirement also enables the Monetary Board to achieve its objective of channelling more funds by way of loans to the small businesses and individuals for their investment and consumption, which in turn accelerates the current economic revival. 

However, the Central Bank has asked LFCs to ensure that they have their liquid asset requirements at their original levels when this extension expires.