By Uditha Jayasinghe
A slew of measures have been introduced to promote credibility of Government Securities markets and the Employers Provident Fund (EPF) as the Central Bank works to shore up credibility and transparency, Governor Dr. Indrajit Coomaraswamy said yesterday.
The Governor set out an exhaustive list of the actions set out by the Central Bank during a press briefing on Tuesday, which included pre-bid meetings by the public debt department so primary dealers are briefed on the auction amount, the series and other relevant information in relation to the forthcoming auction. These meetings ensure the same information is available to all primary dealers and have been held since July. Since June onwards a decision has been taken not to accept more than the offered amount, though the Central Bank can accept less.
The introduction of the Bloomberg trading platform has also introduced a higher form of price discovery and transparency in the system as well as increased confidence has resulted in the volume of trading on the platform increasing significantly, especially in the secondary market. CCTV cameras have also been introduced to provide greater security of the auction process with the equipment being installed at the relevant areas of the public debt department. A quarterly auction calendar is presented to all market participants so information is available on potential transactions, the Governor told reporters.
“We also have with us a Consultant from the US Treasury who is looking at a number of things including the auction process, cash flow management and debt management strategy as well as establishing a good database. Though she is from the US Treasury she has considerable experience in assisting developing countries in terms of the promotion of their government securities market.”
Several additional measures are also in the pipeline, explained Dr. Coomaraswamy, with the most significant being the proposed introduction of an electronic trading platform and bond clearing house consisting of an essential counterparty clearing and settlement facility for government securities. Already the procurement and technical evaluation committees have been established and the Central Bank expects its implementation over the next 12 months. “This will greatly increase the transparency of government securities market operations. We are also developing new auction rules. The Central Bank Public Debt Department has consulted all the senior offices of the Central Bank who have worked in the public debt area in developing a fresh set of auction rules. The outcome of this process has been shared with the World Bank and the International Monetary Fund (IMF) and we want to get validation of this auction system before we go live with it and we hope to do that in the first quarter of 2017.”
The new auction system will be a “hybrid” because it will be transparent and to address the immaturity of local market development to sustain a pure auction system. “So we are looking at a hybrid system of competitive and non-competitive bidding” once the system has been validated it will then be discussed with all stakeholders, noted the Governor, before it goes live. The existing web-based auction system will also be enhanced by the Central Bank IT department with the upgrade likely to be implemented over the next few weeks.
“Several steps have also been taken with the Finance Ministry. The Treasury is also studying the possibility of implementing liability management for US dollar denominated borrowing and thereafter for Rupee denominated borrowings and the Central Bank will work closely on developing that. There is a Public Debt Act where a team of professionals are consolidating all the statutes relating to debt management and a separate debt management unit is being set up under the Finance Ministry.
“This in my view a very positive development because for years now the Central Bank has had to cope with the conflict of interest of trying to conduct independent monetary policy while at the same time raising money for the Government as cheaply as possible. As you can imagine, those two objectives can come into conflict. Taking the debt management function away enables the Central Bank to have greater room to manoeuvre and conduct an independent monetary policy.”
Parallel to these steps measures have also been taken by the Employees Provident Fund (EPF) to address its operational concerns in the Government Securities market. Since end-October the EPF no longer trades in secondary markets, limiting its functions to only the primary market. An investment committee chaired by a Central Bank Deputy Governor meets daily to take investment decisions and structural changes have also been made within the fund management division.
Investments of short-term cash surpluses are now limited to open market operations and since EPF trading in the secondary market has been limited the Central Bank has opened up the possibility for the entity to engage in alternative investments including investment in the fixed deposits of State banks.
“Other initiatives include the proposed introduction of CCTV, a recording system and traders will now undertake transactions only through official mobile phones that have been given to them. So these are all measures that have been taken to strengthen operations within the Government Securities market, which has been the subject of considerable controversy. We feel we have made significant progress. We are not saying we have fixed everything, things are under constant review, we are open to suggestions but I think my colleagues both in the Monetary Board and the Central Bank have thought through these things carefully and taken us forward in terms of having a transparent Government Securities market, which operates with credibility and integrity.”
Licensing for vetted microfinance companies under new Act
The Central Bank yesterday also called for microfinance companies who fall in line with the provisions of the new Microfinance Act to apply for licensing.
The Microfinance Act, No. 6 of 2016 was enacted with the objective of providing a regulatory framework to cover microfinance institutions that are not regulated at present. The purpose of the Act is to improve the delivery of financial services to low income persons and micro enterprises, increase financial inclusion, strengthen the soundness and systems of microfinance institutions, facilitate microfinance institutions to access wider sources of funding, promote consumer protection and promote a safe and stable financial system.
The Microfinance Act came in to operation on 15 July 2016. Accordingly, the Monetary Board of the Central Bank of Sri Lanka is empowered to issue licences for applicant companies carrying on microfinance business, issue rules and directions for Licensed Microfinance Companies (LMFCs) and issue guidelines to the Registrar of Voluntary Social Services Organisations for the regulation and supervision of Microfinance Non-Governmental Organizations (MNGOs).
In line with the provisions of the Microfinance Act, the Monetary Board has taken steps to facilitate this process. Accordingly, two rules addressing licensing criteria and licensing fee and eight directions covering the main prudential requirements such as capital, liquid assets, statutory reserve, deposits, Supervision of Microfinance Institutions accommodations, fitness and propriety of relevant personnel governing LMFCs, assessment of shareholders and reporting requirements have been issued with effective from 27 October 2016.
Institutions that fulfill the licensing criteria may apply for licensing under the Microfinance Act, which will be evaluated by the Monetary Board. The prudential directions will ensure the sound functioning and resilience of LMFCs.
The guidelines to the Registrar of Voluntary Social Services Organisations are currently at the discussion stage with relevant stakeholders and will be issued by the Monetary Board in due course.