Sri Lanka’s Central Bank guarantees Covid-19 credit facility to all SMEs

Sri Lanka’s Central Bank said it would guarantee banks loans to affected coronavirus businesses from their funds as well as 175 billion liquidity rupees generated through two reserve ratio cuts. “Under this scheme, we are allowing banks to grant loans to meet the working capital requirements of the businesses concerned,” the monetary authority said in a statement.

The Central Bank said it would operate in parallel with a refinancing (printed money) scheme of 150 billion rupees. The Central Bank reported banks could use their deposits or the liquidity released from two cuts in the reserve ratio, which amounted to nearly 180 billion rupees and offer 4 per cent of the loans.

The guarantee would preferably have come from the Treasury. However, any losses from central banks will also end up at the Treasury, analysts note. Unlike primary bank refinancing, there is no strain on the rupee or foreign reserve losses when banks donate their funds.

The Central Bank already pays 5.5% for money released from SRR cuts, which to some extent will discourage misinvestments. The Central Bank is injecting capital at 1 per cent on the 150 billion rupee refinancing, while the policy rate is 6.5 per cent.

This system, launched on 1 July 2020, will run in tandem with the Saubagya COVID-19 Recovery Facility and the new provision approved by the Monetary Board according to Section 83 of the Monetary Law Act, within the already announced Rs. 150 billion thresholds.

Below this scheme, the Central Bank will provide banks with a credit guarantee, varying from 80 per cent for less significant loans to 50 per cent for comparatively large loans, allowing banks to grant loans to meet the working capital requirements of the businesses concerned.

With the Central Bank attracting a significantly higher percentage of credit risk, banks can extend their lending to vulnerable businesses focusing on such businesses’ viability and cash flows, rather than collateral. Banks will have to use their funds, in particular the additional liquidity of close to rupees one hundred eighty billion provided by the Central Bank through a cumulative reduction in the statutory reserve ratio (SRR) of 300 basis points so far during the pandemic period, to grant companies loans of 4 per cent.

The Central Bank must offer a 5 per cent interest subsidy to cover the sum of bank deposits. Operating guidelines for this scheme will be given to banks in due course immediately.

OSL Take: The government of Sri Lanka has not left any stones unturned in the path to bring the country’s economy back to normalcy following the post-COVID 19 pandemic situation. Given Sri Lanka’s terrestrial positioning in the Indian Ocean, the ease of doing business environment and the many trade accords, as well as trade discounts enjoyed by the country, all will undoubtedly expedite the country’s economic revival. Foreign businesses/investors could, therefore, explore business/investment opportunities in Sri Lanka with confidence.

VBS/AT/06082020/Z_TB4