Corporate sector scrambling for funds
Sri Lanka’s corporate sector is scrambling for cash to recapitalise and restructure operations hit by COVID -19 pandemic at a time when the country’s economic activities resumes shortly.
Although the Monetary Board has unveiled a raft of measures to assist affected companies; there was an urgent need to improve liquidity and minimise funding requirements.
With the economic impact of the pandemic likely to affect the country for several more months or till the end of this year, it is compelling companies to look for additional liquidity outside their bank credit lines.
COVID-19 has impacted demand across almost every sector of the economy, with big and small businesses affected acutely.
The Central Bank has launched a Rs. 50 billion refinancing scheme to facilitate concessions such as the debt moratorium and working capital facilities for business and individuals impacted by COVID-19 .
A 6-month debt moratorium for affected industries and eligible sectors for term loans and trade finance loans has been granted including a 6-month extension for permanent overdraft facilities, 2-month extension for temporary overdraft facilities for eligible borrowers and the interest rate to be capped at 13 per cent.
Considering the difficulties faced by some customers of financial institutions affected by the COVID-19 pandemic, the Central Bank has extended the April 30 deadline for submitting requests for debt moratoriums and 4 per cent per annum refinancing facility for two months working capital, to May 15.
Further, where the validity period of cheques valued less than Rs.500,000 has expired, the banks are required to consider them as valid until May 15.
However affected businessmen and entrepreneurs complained that there were practical problems and barriers in providing these facilities by commercial banks and licenced finance companies due to loopholes in the guidelines issued by the Central Bank.
They noted that 4 per cent per annum refinancing facility for two months working capital will not serve the purpose of bailing out companies on the verge of collapsing as the majority of the country’s business enterprises cannot overcome their liquidity issues in two years under the prevailing economic conditions.
Further commercial banks including state banks are demanding movable or immovable property as collateral to approve this loan facility to businessmen and entrepreneurs and the requirement of surety was clearly indicated in the loan application form, they added.
On the other hand the Rs. 50 billion refinance facility will not be sufficient to meet the working capital requirement ranging from a minimum of Rs 1, 10 and 30 million per month of the small medium and large scale enterprises.
Some banks are recovering the interest from their customer businessmen and entrepreneurs during the moratorium period without extending concessions given for the repayment of loan instalments in accordance with the Central Bank guidelines, they complained.
These banks are blocking the granting of these concessions making use of loopholes in those guidelines, they added.
Senior Deputy Secretary of the Ceylon Bank Employees Union Kesara Kottegoda told the Business Times that banks should provide maximum financial relief for customers without blocking concessions granted to them during this difficult period.
In these circumstances, a COVID Equity Fund should be established to infuse liquidity into affected companies to meet short-term operating needs, Prime Minister’s Senior Adviser on Economic Affairs Ajith Nivard Cabraal told the Business Times.
Revealing this proposal to face the calamity, he suggested that the Government and banks together should devise a strategy to attract some new investors who can provide a sum of around Rs. 150 billion (US$750 billion) for this ‘Fund’.
This would be similar to action taken by Malaysia to face the Asian financial crisis establishing the ‘Danamodal’ institution towards managing the liquidity issue, he said.
“This fund could be managed by a private sector board as well as a CEO and it would purchase shares, equity in these businesses that are presently under COVID -19 threat. And in turn they could be given shares, which then would instill a new hope and a new set of confident policies that can be implemented by these businesses shortly,” he emphasised.
Necessary finances for this fund could be raised from long-term investors such as sovereign wealth funds, pension plans, wealthy family offices and some public funds.
It could be boosted by some of those limited partners in private equity funds, led by Canadian pension plans and some of the West Asian and Asian sovereign wealth funds, opening further groups to co-invest directly in targets alongside the private equity sponsors, he disclosed.
After three-to-five years, the fund could exit from these investors by implementing an exit strategy (selling the shares in the market or on a buy-back arrangement), he pointed out,
All these companies could be rescued and uplifted to a better level than the present status, he added.