SL’s Central Bank to bail out troubled finance companies
View(s):The Central Bank of Sri Lanka (CB) on Saturday introduced a scheme seen as bailing out troubled finance companies, a number that has been growing in recent times.
A public announcement from the Bank said it was “implementing a Liquidity Support Scheme (LSS) for any licensed finance company (LFC) that faces liquidity constraints, thereby enabling such LFC to revive and restructure its operations.
This it said was in view to sustaining financial system stability and enhancing public confidence in the financial system.
A number of finance companies, smaller in number however compared to the crash about 4-5 years ago, have been struggling with an inability to pay back deposits or even monthly interest to depositors due to either a liquidity crisis or bad management. Last week’s Sunday Times reported the crisis that has befallen the Central Investments & Finance Ltd (CIFL) while the Business Times has also regularly focused on many other crises faced by finance companies while carrying letters from desperate depositors.
Liquidity support from the CB would be provided via the Sri Lanka Deposit Insurance Fund (SLDIF), and would be granted on a case by case basis, after an assessment of the liquidity position of the particular LFC, by the CB.
In tandem with the LSS, the CB said it may direct the existing shareholders of the LFC to infuse fresh capital, or invite a strategic investor to assume a strategic stake in the LFC through a new infusion of capital, or in certain instances, direct the depositors to convert a part of their deposit liabilities into ordinary shares.
In order to obtain facilities under the LSS, “a LFC will be required to submit an acceptable business restructuring plan to the CB, and also meet the terms and conditions prescribed by the CB, which would include the restriction of transactions with related parties, curtailment of remuneration and incentive payments to the board of directors and key management personnel, reduction of administrative costs, furnishing of acceptable collateral, and submission of periodic reports on the progress of the implementation of the restructuring plan”, the announcement said.
The LSS will come into operation with immediate effect.
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