Lifeline for distressed Licensed Finance Companies

Monday, 9 September 2013 00:15 - - {{hitsCtrl.values.hits}}

The Central Bank has come with a lifeline offer for distressed finance companies subject to several conditions. The Central Bank said with a view to sustaining financial system stability and enhancing public confidence in the financial system, it has decided to implement a Liquidity Support Scheme (LSS) for any licensed finance company (LFC) that faces liquidity constraints, thereby enabling such LFCs to revive and restructure operations. The LSS will come into operation with immediate effect. The liquidity support would be provided via the LSS of the Sri Lanka Deposit Insurance Fund (SLDIF), and would be granted on a case by case basis, after an assessment of the liquidity position of the particular LFC, by the CBSL. In tandem with the LSS, the CBSL may direct the existing shareholders of the LFC to infuse fresh capital, or invite a strategic investor to assume a strategic stake in the LFC through a new infusion of capital, or in certain instances, direct the depositors to convert a part of their deposit liabilities into ordinary shares.

In order to obtain facilities under the LSS, a LFC will be required to submit an acceptable business restructuring plan to the CBSL and also meet the terms and conditions prescribed by the CBSL, which would include the restriction of transactions with related parties, curtailment of remuneration and incentive payments to the board of directors and key management personnel, reduction of administrative costs, furnishing of acceptable collateral and submission of periodic reports on the progress of the implementation of the restructuring plan. As at end 2012, the asset base of LFCs amounted to Rs. 536 billion, up by Rs. 184 billion or 52% in 2011. As a share of total assets of the overall financial services industry LFCs were 5.9% in 2012 up from 4.6% in the previous year. The move by the CB comes amidst effort to save Central Investments and Finance PLC (CIFL) which is in crisis. Having appointed People’s Leasing and Finance PLC as Managing Agents, a revival plan is being put before depositors of CIFL. As at June 2013, CIFL had a deposit liability of Rs. 3.2 billion, up from Rs. 2.7 billion a year earlier. It also had bank overdrafts of Rs. 126 million and short term borrowing of Rs. 75 million. Additional there were Rs. 108 million of creditors and other payables. Its asset base was Rs. 3.8 billion almost unchanged from a year earlier. Half of that was by way of investments in joint venture projects amounting to Rs. 1.6 billion. Advances and other receivables were Rs. 531 million and Rs. 484 million as loans. As at June 2013 retained losses at CIFL were Rs. 459 million as opposed to a positive figure of Rs. 56 million a year earlier. Total shareholder funds amounted to Rs. 187 million, down from Rs. 705 million in June 2011. ASPIC Corporation owns 22% stake in CIFL whilst public holding is 77.4%.