Business Times

Central Bank begins bailout of troubled finance companies

By Bandula Sirimanna

Sri Lanka’s registered finance companies (RFCs) are now gaining public confidence with the intervention of the Central Bank (CB) to provide credit guarantees to commercial banks to secure loans from the latter.

The CB is in the process of considering applications from finance companies to issue a guarantee for a loan facility from commercial banks to tackle their liquidity problems under the Rs.4.25 billion credit guarantee facility, said Central Bank Additional Director, Department of Supervision Non-Bank Financial Institutions H. M. Ekanayake, in an interview with Business Times.

The total deposit base of 35 RFCs is around Rs 122 billion and the total asset base is in the region of Rs.186 billion at present. Mr Ekanayake said that RFC asset base will grow by around 10 % and deposits by over 10 %. He also predicted a 12 % growth in lending.

Six out of the 35 RFCs were hit by runs on deposits and liquidity constraints since early 2009 due to a decline in inflow of new funds and the reluctance of some banking institutions to provide loan facilities to these companies. The CB intervened to settle the financial crisis by introducing a bailout package and appointing management agents at that time.

“During the past few months these finance companies have shown a remarkable progress. They expect their liquidity ratio to improve gradually,” Mr Ekanayake said.

One application for a loan facility through a commercial bank is now being evaluated by the CB, and this company will get the greenlight shortly, he said, without elaborating about the name of the finance company.

The Finance, F&G Finance, Asian Finance and Industrial Finance were among the six troubled companies, he said. He added that the CB will assess the need for such guarantees for the applicant RFC and the quality of assets mortgaged or assigned in respect of obtaining a loan facility.

Mr Ekanayake noted that the guaranteeing of bank loans by the CB will benefit banking institutions too as they could extend their facilities at a lower credit risk and as it will enable them to diversify their portfolios. He expressed the belief that this scheme will enhance inflow of funds to vulnerable RFCs and relieve the liquidity constraints within a short period of time thereby enabling them to carry on their normal businesses and to contribute to the economic growth in the country.

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