EconomyNext – Sri Lanka’s Central Bank said it had given a liquidity facility to The Finance Company, a troubled non-bank lender in what was called a ‘second phase of re-structuring."
The firm signed up a "long term concessionary loan facility" from the Sri Lanka Deposit Insurance and Liquidity Support Fund, the Central Bank said in a statement.
The fund performs somewhat similar functions of a lender of last resort facility.
Though the exact terms of the loan was not disclosed market sources familiar with the matter say it be as much as 6 billion rupees.
"…TFC is now expected to further consolidate its progress towards reaching a stable, sustainable and profitable level that would enable the company to attract new equity capital through a suitable future share issue," the Central Bank said.
Sri Lanka’s interest rates are now moving down, following a balance of payments crisis in 2011/2012 triggered by bank funded fuel subsidies which were ultimate Central Bank accommodated.
The Finance Company originally got into difficulties in the wake of a balance of payments crisis in 2008/2009 when there was a run on Sri Lanka’s Ceylinco group companies.
The Central Bank is reducing the amount of non bank lenders by consolidating them with larger units of banks in bid to make the sector stronger and less vulnerable to failure.
However analysts warn that bank and non bank lenders can get into trouble when low interest rates persist for a long time, which leads to credit bubbles, mal-investments and defaults.