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Sri Lanka’s central bank to guarantee Covid-19 credit

ECONOMYNEXT – Sri Lanka’s central bank said it will guarantee loans given by banks for Coroanvirus affected businesses, from their own funds as well as 175 billion rupees of liquidity released through two reserve ratio cuts.

“Under this Scheme, the Central Bank will provide a credit guarantee to banks, ranging from 80 per cent for smaller loans to 50 per cent for relatively large loans, enabling banks to grant loans to address working capital requirements of the affected businesses,” the monetary authority said in a statement.

“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 cashflows of such businesses rather than collateral.”

The central bank said it will operate in parallel to a 150 billion rupee schemed with re-finance (printed money) scheme.

The central bank said banks could use their own deposits or the liquidity released from two reserve ratio cuts, which amounted to close to 180 billon rupees, and give the loans at 4 percent.

“The Central Bank will provide an interest subsidy of 5 per cent to cover the cost of funds of banks,” the monetary authority said.

Ideally the guarantee should have come from the Treasury. But any central bank losses will also end up in the Treasury, analysts say.

When banks give their own funds, there is no pressure on the rupee or foreign reserve losses, unlike central bank re-finance.

The central bank is already paying 5.5 percent for money released from SRR cuts, which will discourage mal-investments to some extent.

On the 150 billion rupee re-finance the central bank is injecting money at 1 percent, though the policy rate is 6.5 percent. (Colombo/June28/2020)

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The full statement is reproduced below:

Regional Development Department
28-06-2020

The Central Bank Implements a Credit Guarantee and Interest Subsidy Scheme for Businesses affected by the COVID-19 Pandemic

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 26 June 2020, decided to implement a Credit Guarantee and Interest Subsidy Scheme to accelerate lending by banks to businesses adversely affected by the COVID-19 pandemic. This scheme, which will be launched on 01 July 2020, will operate in parallel with the Saubagya COVID-19 Renaissance Facility and the new Facility approved by the Monetary Board under Section 83 of the Monetary Law Act, 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 smaller loans to 50 per cent for relatively large loans, enabling banks to grant loans to address working capital requirements 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 cashflows 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 of banks.

Operating instructions on this scheme will be issued to banks in immediate due course.