CB grants leeway for banks to invest in Sri Lanka issued int’l sovereign bonds

The Central Bank has granted access to licensed commercial banks (LCBs) and the National Savings Bank (NSB) to purchase Sri Lanka issued international sovereign bonds (SLISBs) after six months since they were barred from doing so, but under certain conditions. 

In a direction issued this week, the Central Bank granted access to LCBs and the NSB to purchase SLISBs in the secondary market out of fresh funds raised overseas, to minimise the pressure on the dollar/rupee exchange rate. 

The banks which operate with excess foreign currency liquidity as a result of foreign currency deposits and fresh borrowings raised to support on-lending activities use SLISBs and Sri Lanka Development Bonds (SLDBs) as attractive avenues to park these funds until opportunity comes to give such moneys as loans.

The banks also do so as they offer attractive yields and provide a natural hedge against the foreign currency borrowings they make. 

By the end of last financial year ended December 2020, the five largest private sector LCBs alone had nearly half a trillion rupee equivalent invested in dollar denominated bonds and the figure could run much higher if the holdings by the two State banks and the NSB were included.

However, such new foreign funds raised must be invested equally between the SLISBs and SLDBs and banks should provide the Central Bank proof of the investment mix. 

“Investments of funds sourced above (fresh borrowings) in SLDBs and ISBs in the proportion of 50 percent each, and LCBs and NSB shall submit the following information on their investments in ISBs and SLDBs to the Director Bank Supervision and the Superintendent, Public Debt Department,” the Directive said specifying the information that must be filed. 

The banks were also asked to ensure that they prevent any maturity mismatches between their borrowings and the investments in ISB and SLDB investments. 

Typically banks manage their assets and liabilities, that is loans and investments and deposits and other funds raised via capital and borrowings matching with their maturity profiles to ensure that they do not run out of funds when their deposits or other borrowings fall due. For instance they often match five-year loans they provide with five-year debenture or deposits with five-year maturity, so the banks precisely know that they will have funds to retire the debenture or the deposits if the deposit holders come asking for their money at the end of their tenor. But deposits often get re-invested at maturity while bonds are being re-issued, greatly reducing the maturity mismatch risk.