CB says deposit insurance scheme not for investors of debentures, commercial papers

The Central Bank said the investors of promissory notes, commercial papers and debentures do not get the protection under its deposit insurance scheme and informed the public to exercise extreme care and be vigilant when investing their money in such instruments offered by various institutions. 

In a statement issued through the Non-bank Supervision Department of the Central Bank towards the end of last week, the regulator said although such products might be attractive in terms of return, individuals should ensure the appropriateness of such funds for their purpose. 

“The Central Bank of Sri Lanka (CBSL) has observed that some entities mobilise funds from the public without giving adequate information regarding the true nature of such instruments and without following the accepted procedure for such activities. 

“In this background, the CBSL wishes to inform the public to be vigilant on the legal status of various financial products, the standard procedure for issuing such instruments and the risks involved in investing in such products”, the statement said. 

Companies, banks and non-bank lenders from time-to-time issue different kinds of financial instruments to raise money for various purposes such as investments and/or working capital or liquidity needs.

 
While there is plethora of instruments, debentures and commercial papers are the mostly used in the current context. 

In recent times non-bank lenders or finance companies found it extremely challenging to mobilise deposits given the competition from banks. 

In such circumstance, the funds are raised through debentures and such issuances are required to go through the Securities And Exchange Commission (SEC), irrespective of them being listed or unlisted issuances. 

Listed issuances cannot be made unless a finance company has at least one notch above the minimum investment grade rating, according to listing rules of the Colombo Stock Exchange and the SEC.  Hence some of the companies may be contemplating on making unlisted public issues. 

However, any expectation that the Central Bank’s deposit insurance scheme will come to the rescue of the investors of such instruments, in case of such issuers come under stress, is absolved.  “….the investments in such instruments do not fall in to the category of deposits in the normal circumstance. 

“In the event of any default by the issuer of such instruments, investors have no protection under the deposit insurance scheme,” the statement added.  The Central Bank also said that if anybody wishes to invest in such instruments, he/she must do so after reading the offer documents, contents in the agreement, terms and conditions applicable for return, premature redemption and terms of maturity etc. 

Under the present regulations, the deposit insurance scheme covers depositors up to a maximum of Rs.600, 000 per depositor, in the event of a failure of CBSL-regulated bank or finance company.