The Central Bank (CB) on Friday announced a Rs 4-billion bailout package for ailing finance and leasing companies, caught up in the Golden Key and Sakvithi debacles and aimed at restoring public confidence.
CB Governor Ajith Nivard Cabraal told reporters that the fallout from the collapse of unauthorized financial institutions has created the current difficulties companies face which includes a severe liquidity shortage.
Deputy Governor Ranee Jayamaha said banks began distrusting finance and leasing companies by not extending credit lines, asking for more collateral or increasing interest rates.
The 8-point plan included purchasing land owned by these companies, providing guarantees to banks on credit facilities extended to this sector, reducing lending and deposit rates by 2% to help encourage business activity, and taking steps to ensure repossessed vehicles will be put to productive use. According to the 8-Point Plan: (1) Companies are facing extreme difficulties from the inability to sell land and generate liquidity.
Therefore after land valuations, Lankaputhra Development Bank will purchase 67% of the valuation of the land that any companies want to sell.
Mr. Cabraal said the property can be transferred on a case to case basis by institutions that want to sell and need the money urgently.
He added that liquidity will flow immediately, allowing companies to do business. The funds needed for this part of the package has been estimated at Rs.2 billion which will be provided by the government. Lankaputhra will be given 2 year treasury bonds by the government and can use them to pay the companies. (2) The CB will appoint a 3-member special oversight committee which will oversee the entire operation to ensure it continues in a manner which will prove successful, said Mr. Cabraal.
He added that the members will be announced shortly. (3). The government will provide guarantees to banks on credit facilities outstanding as at 30 September 2008. Mr. Cabraal further stated that the CB will request licensed banks to continue their business with the finance and leasing companies. (4). The CB will take action to reduce liquidity requirement ratios on fixed deposits to 10% from 15% and reduce the requirement ratios on savings deposits to 15% from 20%.
(5). The CB will ensure that the companies who avail themselves of the concessions will have to cease any transfer of funds to related parties. In addition, companies will have to curtail the remuneration of company directors to a level prescribed by the CB. Mr. Cabraal said this step is necessary to ensure that public funds will not be abused. Dr. Jayamaha pointed out that director boards take huge remuneration packages but have to show restraint when using public funds.
(6). The CB will consider the release of funds if needed in the medium or long term. (7). The CB intends to take steps to reduce lending and deposit rates by 2% to help encourage business activity. (8). The CB, the Ministry of Finance and related parties will take steps to ensure that repossessed vehicles will be put to productive use, a point stressed by the President when he met with the heads of finance and leasing companies in late January 2009. Mr. Cabraal said that repossessed vehicles will most likely to given back to the original owners.
Mr. Cabraal stated that as a result of the package, all financial institutions will benefit, adding that the plan will be implemented in a short period of time, as fast as possible.
Chairman of the Finance Houses Association Mr. Shirley Perera said the finance and leasing companies have not been officially informed by the CB. He said he will have to study more carefully the details of the stimulus package as well as the conditions being set forth by the government. However, Mr. Perera did say that it looks like the member companies who will avail themselves to the stimulus package will be happy and would most probably agree to the conditions.
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