Eased liquidity standards and capital reprieve for finance firms to support virus-hit sectors

A day after the Monetary Board eased capital, regulatory and reporting rules on the banking sector, more or less similar relaxed rules have been offered to finance companies, including a lower floor for mandatory liquidity maintenance, to obtain their support to provide relief to the affected businesses and individuals from the COVID-19 crisis.

Further, the Central Bank is also looking at the possibility of making use of the Sri Lanka Deposit Insurance Scheme and Liquidity Support Scheme for licensed finance companies (LFCs), should it require. 

In a separate letter to the chiefs of LFCs and specialised leasing companies (SLCs), the Central Bank announced several regulatory forbearance measures in the areas of capital, liquidity and statutory returns, to help support the sector, “as a temporary step giving due consideration to the imminent threat faced by LFCs and SLCs”.

To this effect, the Monetary Board has decided to reduce the regulatory minimum liquid asset requirement needed for time deposits, savings deposits and borrowings to ease liquidity stress faced by LFCs and SLCs, which could be caused by sudden withdrawal of cash by depositors and non-payment of loan rentals. 

Currently, all finance companies should maintain a minimum of 10 percent of its time deposits as liquid assets and 15 percent of savings deposits. 

In addition, a finance company should also maintain a minimum of 10 percent of its outstanding borrowings as liquidity, the Finance Companies (Liquid Assets) Direction No.04 of 2013 stated. 

However, the Central Bank’s press communiqué issued on Tuesday did not say the level to which these minimums were brought down and how much of liquidity would be released to the industry as a result of the measure, although a more detailed version may have been sent to each company. 

Besides the lower floor for liquidity, the Monetary Board has also decided to provide an extension of one year to meet the minimum core capital requirements by the finance companies. 
“Accordingly, the timeline of 01.01.2020 and 01.01.2021 already set for the enhancement of capital up to Rs.2.0 billion and Rs.2.5 billion, will be extended until 31.12.2020 and 31.12.2021, respectively,” the Central Bank said.

Along with the move, the Monetary Board has also given the sector a deferred time frame for the enhancement of minimum capital adequacy requirements applicable for each sector, LFCs and SLCs. 

As a result, the original timelines set for July 1 in 2020 and 2021, respectively, have been extended by one year from each. 

“Further, it has been decided to relax deadlines on submission of statutory returns and accordingly, all LFCs/SLCs are informed to submit statutory returns to the Supervision of Non-Bank Financial Institutions Department within two weeks of the commencement of normal business operations of such LFCs/SLCs. 

LFCs/SLCs are advised to diligently monitor their risk profile and resources during this period, while the Central Bank will 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,” the Central Bank communiqué said.