No depositor will be left high and dry -Central Bank | Sunday Observer

No depositor will be left high and dry -Central Bank

The Central Bank will complete the second stage of recompensation for The Finance Company (TFC) depositors under the deposit insurance scheme soon and will explore the possibility of paying other depositors who had over Rs. 600,000 deposited in the company, after the legal issues have been sorted out, Central Bank Governor W.D. Lakshman said.

“We will not leave any depositor in the lurch but would ensure the return of their hard earned money as soon as the legal issues have been cleared and funds come in,” the Governor said.

However, as in the case of the ETI and certain other now defunct companies whose depositors are yet to receive their money, paying back the money of TFC depositors would be an uphill task for the regulator.

Financial experts have been cautioning the authorities including the regulator about liquidity levels and the accompanying risk of certain financial institutions that lavishly paid high interest rates to lure in investors.

“There is no point in shutting the door after the horse has bolted,” said a senior banker and financial analyst who has been blowing the whistle on certain financial institutions that had been continuing operations despite severe financial crises.

“We have set up a committee comprising experts to monitor the companies identified as high risk entities to ensure they get out of the turbulence and safeguard the interest of its stakeholders ,”the Governor said.

President Gotabaya Rajapaksa directed the Central Bank last week to take steps to compensate depositors of TFC and ETI companies after obtaining legal advice.

He insisted that a committee comprising officials of the Presidential Secretariat, the Central Bank, the Treasury and the depositors be set up to monitor the process.

Meanwhile, the Central Bank last week decided to implement a Credit Guarantee and Interest Subsidy Scheme to accelerate lending by banks to businesses affected by the pandemic.

The scheme will operate parallel to the Saubagya Covid-19 Renaissance Facility and the new facility approved by the Monetary Board within the already announced threshold of Rs. 150 billion.

Under this scheme, the Central Bank will provide a credit guarantee to banks, ranging from 80 per cent for small loans to 50 per cent for relatively large loans, enabling banks to grant loans to address the working capital needs of the affected businesses.

With the Central Bank absorbing a significantly higher percentage of the credit risk, banks can extend their lending to vulnerable businesses focusing on the viability and cash flows of such businesses rather than collateral.

Banks are expected to use their own funds, particularly the additional liquidity of close to Rs. 180 billion provided by the Central Bank through the cumulative reduction in the Statutory Reserve Ratio (SRR) of 300 basis points thus far during the pandemic period, to grant loans at 4 per cent to businesses. The Central Bank will provide an interest subsidy of 5 per cent to cover the cost of funds to banks.

Responding to media reports that vests the responsibility of failure and subsequent cancellation of licence of several finance companies which were licensed under the Finance Business Act, No. 42 of 2011 (FBA) the regulator stated that it carries out the regulation and supervision of licensed finance companies (LFCs) to ensure and strengthen the stability of the LFCs and in turn the stability of the financial system, which is one of the core objectives of the CBSL. “Stability is ensured through minimum capital, minimum liquidity, and provisioning requirements; regulation of investments to reduce concentration risk and corporate Governance requirements. LFCs are managed by boards of directors and key management personnel, which take independent business decisions and take full responsibility of managing the business. Such business decisions may lead to failure of such LFCs, despite continuous regulation and supervision by CBSL.

Cancellation of the licence of an LFC, is the final step of a number of supervisory measures, and is done only when it is established that the continuation of the business would be detrimental to interests of its depositors and other creditors,” the regulator said.

“The banking sector has liquidity remaining up to around Rs. 200 billion. It is now up to the banks to support the financial sector and the economy at large,” the Governor said. - LF