CB to draft company resolution framework
The Central Bank (CB) is drafting a company resolution framework to deal with weak bank and finance companies, officials said.
This framework helps to identify such weak institutions and, before they go bankrupt, to find the modalities of paying the depositors.
Now, the CB is using the Banking Act to deal with such banks but it is not enough, officials said. “We need a stronger set of regulations for banks and a new framework for finance companies. So we are considering a separate law on this resolution framework,” one source told the Business Times. He said this will offer practical guidelines in the areas of problem identification, corrective action, resolution techniques and exit strategies.
“When a bank is no longer viable, or likely to be no longer viable, and has no sensible prospect of becoming feasible once again, the CB should resolve the institution without severe systemic disorder and without exposing the public and also defend its critical functions. The bank as a legal entity may cease to exist, but it should do so in a way that ensures the continuity of access to the crucial functions which maintains financial stability and confidence in the financial system.”
Another official noted that the proposed resolutions will have the ability to supersede the shareholders’ rights, replace management, operate an agent institution and bail where necessary. Recognising the need for advanced planning, the appropriate recovery and resolution plans for banks and finance companies whose feasibility and credibility is critical, he said.
Last year, the International Monetary Fund said that out of the 46 licensed financial companies in Sri Lanka, 15 are facing liquidity issues, with six at a high level of distress with Non Performing Loans ranging from 50 to 90 per cent. The CB said 13 out of 43 have collapsed.
Most recently, the CB cancelled the operating license of The Finance Company PLC, which is to be liquidated and smaller depositors compensated from the CB’s Deposit Insurance Facility. The CB in a statement on May 22 said that the Monetary Board decided to cancel the finance business licence (FBA) issued to TFC, with effect from 22nd May 2020. “Accordingly, TFC is not permitted to engage in Finance Business under the FBA with effect from such date.”
The Deposit Insurance Facility which was set up by the CB will compensate 135,000 depositors out of 145,172 depositors up to 600,000 rupees, the statement said.