An Echelon Media Company
Wednesday May 12th, 2021
Banking

Sri Lanka raises finance company forex borrowing ceiling

ECONOMYNEXT – Sri Lanka’s central bank said it is raising the foreign borrowing limit of licensed finance companies (LFCs) to 20 to percent of assets from 10 percent, subject to prudential rules and the proceeds will have to be swapped with the monetary authority.

“The objectives of these directions are to stabilise any financial volatilities created by the foreign funding exposures of LFCs and provide a risk management framework for such foreign currency borrowings,” the central bank said.

“LFCs are allowed to borrow foreign currency up to 20 per cent of a company’s total assets under three stages based on the overall performance of each company including capital and liquidity levels, utilization purposes, nature of collaterals and the credit rating.”

The finance companies will have to swap the loans with the central bank, in a move that will boost gross reserves.

The proceeds can be used to fund government projects, exports, import substitution, small and medium enterprises or any other sectors designated by the monetary board of Sri Lanka.
The full statement is reproduced below:

Introduction of a Regulatory Framework to Facilitate Foreign Currency Borrowings by Licensed Finance Companies

The Monetary Board of the Central Bank of Sri Lanka (CBSL) issued directions on foreign currency borrowings by Licensed Finance Companies (LFCs) on 9th April 2021 with a view to provide flexibility for LFCs to obtain low-cost funding from foreign sources to support their business expansions.

The objectives of these directions are to stabilise any financial volatilities created by the foreign funding exposures of LFCs and provide a risk management framework for such foreign currency borrowings.

Prior to these directions, CBSL permitted LFCs satisfying criteria such as utilization for purposes with national interest, maturities over 5 years, complying with the prudential requirements, etc. to raise foreign currency borrowings on a case-by-case basis up to 10 per cent of total assets.

Considering that several LFCs have been raising foreign borrowings at relatively lower costs to finance their business operations, their satisfactory track record in loan repayments and the current market developments, the new directions have been introduced with the following features.

1. LFCs are allowed to borrow foreign currency up to 20 per cent of a company’s total assets under three stages based on the overall performance of each company including capital and liquidity levels, utilization purposes, nature of collaterals and the credit rating.

2. Any foreign currency borrowings up to 10 per cent of a company’s total assets do not require CBSL approval except prior notification, while the borrowings exceeding 10 per cent require prior approval of CBSL.

3. The tenure of the foreign currency borrowings shall be 2 years or more.

4. CBSL has facilitated the hedging of foreign exchange risk of the loan proceeds through the Licensed Commercial Banks, while LFCs are required to manage the foreign exchange risk of loan interest payments through appropriate derivative products.

Leave a Comment

Your email address will not be published. Required fields are marked *

Your email address will not be published. Required fields are marked *

Comments

Leave a Comment

Your email address will not be published. Required fields are marked *

Your email address will not be published. Required fields are marked *