CB extends relief on liquid assets for finance companies by further six months

• Lower mandatory liquid asset requirement leaves more funds with finance companies for lending and other investment activities 

The Central Bank has extended relief measures afforded to licensed finance companies (LFCs) on mandatory liquidity standards by further six months to ride pandemic-induced business challenges. 

In a fresh amendment to the Direction on liquid assets of licensed finance companies, the Monetary Board last week extended the minimum mandatory liquid asset requirement of six percent on the outstanding value of time deposits and face value of non-transferable certificates of deposits issued and accrued interests payable thereof at the close of a business day. 
The same requirement for the savings deposits was 10 percent from October 1, 2020 till March 31, 2020. 

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, the 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. 

At the beginning of the pandemic on March 31, 2020, the Monetary Board brought down the two requirements to the current levels for six months in view of challenging business conditions triggered by the pandemic. 

This amendment to the Direction No.4 of 2013 lapsed on September 30, 2020. 

“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 COVID-19 pandemic,” Prof. W.D. Lakshman, the Chairman of the Monetary Board and the Governor of the Central Bank said in the fresh amendment to the Direction issued last week. 

The lower mandatory liquid asset requirement leaves more funds with finance companies, if otherwise locked 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 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 as loans to small businesses and individuals for their investment and consumption, which in turn accelerates the current economic revival. However, this comes at a slightly higher risk. The Central Bank said it would continue to closely monitor the liquidity and capital positions of LFCs in order to detect any early warnings of stress to ensure safety and soundness of the non-banking financial institutions sector.