Sri Lanka developing resolution law for finance companies, acting on legacy cases
ECONOMYNEXT – Sri Lanka is working on a resolution law that will help deal with finance companies that get into trouble, while clearing a back log of legacy firms including primary dealers that became insolvent 10 years ago, Central Bank Governor Indrajit Coomaraswamy said.
"We are developing a resolution framework and also an Act for resolution," Governor Coomaraswamy said.
He said the existing act governing non-bank lenders also had strong powers, and they were being used.
Sri Lanka’s current set of finance companies got into trouble following a period of loose policy and high inflation which started around late 2004 and ended when a fed-fired bubble also burst in 2008, and domestic rates were also corrected amid a balance of payments crisis.
Most of the Ceylinco group of companies, which operated unregulated finance companies, also collapsed at the time as the collapse of a unregulated firm led to a run on other members of the group including Seylan Bank. The Finance was a regulated member of Ceylinco.
The problems became worse due to so-called ‘regulatory forbearance’ where the firms were not resolved early when capital fell short.
Early mandatory winding up reduces the cost of capital injection or compensation payments.
The Central Bank had also frozen the activities of The Finance Company.
There was no investor in the horizon and the firm was bleeding about 300 million rupees a month, Coomaraswamy said.
Depositors will be paid interest at a lower rate based on the one-year Treasuries yield, but there will be no capital withdrawals for the moment.
A management panel chaired by a former director of the Central Bank, a former deputy general manager of the Bank of Ceylon.
There was some ‘very, very preliminary interest’ from some parties, who are interested in the company because it is the oldest finance company in the country with a brand name, he said.
The Central Bank was paying depositors up to 600,000 rupees per depositor in the case of Standard Finance and CIFL.
In the case of CIFL, 2000 depositors had been repaid and 525 depositors had been repaid in the case of Standard Credit.
Entrust Securities, which was a primary dealer, a court case was under way.
There were regulatory lapses in the case of Entrust Securities which may have been complicated because it was run by politically connected persons, critics say.
In the case of ETI Finance, an investor was purchasing subsidiaries.
The investor had offered 60 million dollars but the Central Bank had felt that the assets were worth more and had insisted on a higher price, of 75 million dollars, which included an investment into a related finance company.
Depositors had been repaid as tranches were received.
Coomaraswamy said it was the Board of Directors that found the buyer. Another buyer had also met the Central Bank and he had referred them to the board. They had offered 61 million dollars.
Coomaraswamy said instead of selling the assets piecemeal, the monetary board felt that it was easier to get a better price by selling them all together. (Colombo/Feb23/2019-SB)