Insolvent firms to operate under debt restructure scheme
Sri Lanka’s insolvent companies are to be allowed to continue operating following government’s decision of enabling creditor banks to avoid declaring bankruptcy of such entities, Finance Ministry sources said.
Business owners with insolvent enterprises have been given an opportunity to renegotiate and/or extend the terms of the loans taken by them from banks although permitting these firms to continue operating poses a significant impediment to growth and economic efficiency.
These firms are to be made efficient or productive to remain competitive in the local market at a time where Sri Lanka is emerging from the economic crisis to a stronger and more resilient economy, a ministry official said.
The challenging macroeconomic environment that prevailed during the recent years disrupted many business entities limiting their income-generating capabilities and hence forcing them to default timely payments of loans, which resulted in impairing the recovery process of licensed banks (LBs).
As evidenced by the increase of nonperforming loans of LBs from 5.2 per cent at end-2019 to 13.6 per cent by the end of 3Q 2023, which marginally improved later to 12.8 per cent by the end of 2023, the credit quality of the banking sector has deteriorated significantly, Central Bank’s economic review report 2023 revealed.
Financial restructuring tools would include debt forgiveness, debt rescheduling including grace periods for the payment of principal and interest, adjustment of interest rates, maturity extensions, and provision of new financing, including interim financing and exit financing, it added.
As per the proposed business revival mechanism of LBs, it is expected that distressed borrowers who are engaged in business activities will be able to revive their businesses with the guidance of LBs, and improved cash flows will be utilised to repay their non-performing loans and thereby improving asset quality of the banking sector, the Central Bank report indicated.