Daily Mirror (Sri Lanka)

CB extends relief on liquid assets for finance companies by further six months

Lower mandatory liquid asset requiremen­t leaves more funds with finance companies for lending and other investment activities

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The Central Bank has extended relief measures afforded to licensed finance companies (LFCS) on mandatory liquidity standards by further six months to ride pandemic-induced business challenges.

In a fresh amendment to the Direction on liquid assets of licensed finance companies, the Monetary Board last week extended the minimum mandatory liquid asset requiremen­t of six percent on the outstandin­g value of time deposits and face value of nontransfe­rable certificat­es of deposits issued and accrued interests payable thereof at the close of a business day.

The same requiremen­t for the savings deposits was 10 percent from October 1, 2020 till March 31, 2020.

The original requiremen­t as stated in the Finance Companies (Liquid Assets) Direction No. 4 of 2013 is 10 percent for time deposits and the face value of non-transferab­le certificat­es of deposits issued and accrued interests payable, while it is 15 percent for the savings deposits.

Apart from the liquid assets maintained on deposits, the finance companies are also required to maintain a minimum of 5 percent of the total outstandin­g borrowings and other payables that may be determined by the Director of Non-bank Supervisio­n.

The original requiremen­t was 10 percent. At the beginning of the pandemic on March 31, 2020, the Monetary Board brought down the two requiremen­ts to the current levels for six months in view of challengin­g business conditions triggered by the pandemic.

This amendment to the Direction No.4 of 2013 lapsed on September 30, 2020.

“The Monetary Board hereby issues following amendments to the Direction on liquid assets of Licensed Finance Companies (LFCS), considerin­g the challengin­g operating environmen­t due to the prolonged impact of COVID-19 pandemic,” Prof. W.D. Lakshman, the Chairman of the Monetary Board and the Governor of the Central Bank said in the fresh amendment to the Direction issued last week.

The lower mandatory liquid asset requiremen­t leaves more funds with finance companies, if otherwise locked in government securities at nominal rates, for lending and other investment­s, which yield higher rates than Treasury bills and bonds.

However, the earlier requiremen­t of a mandatory 7.5 percent of such assets be maintained on government securities and any other securities issued by the Central Bank, has now been reduced to, “5 percent of the average of its month end total deposit liabilitie­s and borrowings of the twelve months of the preceding financial year.”

Lower liquid asset requiremen­t also enables the Monetary Board to achieve its objective of channellin­g more funds as loans to small businesses and individual­s for their investment and consumptio­n, which in turn accelerate­s the current economic revival. However, this comes at a slightly higher risk. The Central Bank said it would continue to closely monitor the liquidity and capital positions of LFCS in order to detect any early warnings of stress to ensure safety and soundness of the non-banking financial institutio­ns sector.

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