Liquidity scheme for LFCs
The Central Bank (CB) has introduced a liquidity support scheme for
licensed finance companies facing constraints
The CB said that the CIFL crisis was not a problem in the financial
sector or a weakness in supervision. Director, supervision of non bank
financial institutions, H.M. Ekanayake said that CIFL has faced
management issues and liquidity problems due to the mishandling of funds
by its management.
He stressed that this is an institutional problem and not a weakness
in the system nor lack of supervision of non-bank financial
institutions.
His responses on the issue:
Q. What are the reasons for liquidity and management issues at
CIFL?
A. The Board of Directors and the senior management of CIFL
have not performed their duties to safeguard the assets of the company.
Q. Why did CBSL fail to identify this in advance?
A. CIFL had submitted false and incorrect financial
information to the Central Bank of Sri Lanka (CBSL) concealing the true
position of the company.
However, on several occasions the CBSL pointed out the deficiencies
and advised the Board of Directors to rectify the errors. The former
Chief Executive Officer of the company was also removed, due to
malpractices in the company.
Q. Will this kind of crisis lead to a crisis in the financial
sector of the country?
A. No. This is an institutional issue of an individual company
and this will not lead to a financial crisis.
Q. What mechanism does the CBSL use to ensure the safety of
the depositors' money in this type of financial institution?
A. The CBSL has introduced a deposit insurance scheme for
Licensed Banks and Licensed Finance Companies. Under this scheme
deposits are insured and compensation on insured deposits will be paid
when the licence of member-institutions is suspended or cancelled by the
Monetary Board.
However, the payment is currently subject to a maximum of Rs. 200,000
per depositor. As per the provisions of the Finance Business Act,
business restructuring plans are implemented for finance companies which
face financial constraints to resolve issues faced by such companies.
The CBSL has introduced a liquidity support scheme for licensed
finance companies that face financial constraints, to revive and
restructure their operations.
Q. How do depositors select a safe financial company to invest
their money?
A. Licensed Finance Companies are required to publish their
financial statements on a periodical basis and to display financial
statements at the head office and branches enabling depositors to access
financial information of the company.
Licensed Finance Companies are required to publish the credit ratings
given by credit rating agencies and rate of interest offered on deposits
in the advertisements which solicit deposits.
No finance company can pay a rate of interest higher than the maximum
interest rate declared by the Central Bank. Therefore, the public are
advised to check whether the rate of interest offered by the finance
company is within the limits imposed by the Central Bank and to take
their deposit decisions accordingly.
Q. Do you think the measures taken by CBSL will restore the
confidence of depositors?
A. Yes. The action already taken and to be taken will
gradually restore the confidence of depositors of the company which is
facing liquidity constraints. |