The government will guarantee bank credit to registered finance companies totaling to about Rs. 2.2 billion while another Rs. 2 billion two year bonds will be issued to help an intermediary purchase land assets from finance companies struggling to maintain liquidity and prevent the escalation of a severe crisis.

Directors of registered finance companies and leasing companies will face cuts to their remuneration packages if they choose to access the support package.

"They are dealing with public funds and if they want public assistance they will have to demonstrate some commitment and responsibility," Deputy Governor of the Central Bank Dr. Rani Jayamaha said.

The Central Bank announced a policy support package formulated by the government to help stabilize the non-bank financial system (registered finance companies and leasing companies) which is facing a crisis after scandals in unauthorized financial institutions waned public confidence in finance companies.

Central Bank Governor Ajith Nivard Cabraal said finance and leasing companies registered with the Central Bank are suffering the fallout affects of the scandals that hit the unregulated sector of the financial system, causing a strain in their liquidity positions.

He said the support package was intended to ease public distrust of the sector which holds 9 percent of total deposits in the country but is widespread and could lead to the destabilization of the entire financial system.

The package is expected to restore confidence by easing liquidity pressures on finance companies as a result of depositors unwilling to invest and banks unwilling to lend.

The support package has several options available to registered finance companies choosing to access it.

"There are some finance companies that are stable and will not need assistance, but the package will help the entire financial system because it will restore public confidence," Cabraal said.

The following are some of the key features of the support package.

Lankaputhra Bank has been nominated as an intermediary by the Monetary Board to valuate lands finance companies may want to liquidate in a bid to meet customer demands. The Bank will be funded by the state through 2 year Treasury bonds amounting to Rs. 2 billion so that these lands can be purchased at 67 percent of their value. The finance companies can in turn discount the bonds in the market to meet their immediate cash requirements.

Cabraal said the Central Bank does not expect the entire Rs. 2 billion to be utilized.

In a bid to persuade banks to extend existing credit lines to registered finance companies and leasing companies, the government will guarantee banks on lending up to total of outstanding credit as at September 30, 2008.

"If banks and finance companies can come to an agreement on credit terms on their own it will be good, but if banks are still unwilling to lend then finance companies can apply for this facility," Cabraal said.

Cabraal said the government will guarantee credit lines amounting to about Rs. 2 billion but he was confident the actual utilization will be below this.

He said the Central Bank will use moral suasion to force banks to reduce lending and savings rates by a further 2 percent, which is expected to ease the burden of borrowing.

"But this will happen gradually, you will not see an overnight reduction," Cabraal said.

Easing regulatory requirements…

Official liquidity ratios imposed by the Central Bank will be eased for those finance companies that require it.

The liquidity ratio for fixed deposits will be revised from 15 percent to 10 percent while for saving deposits it will be revised from 20 percent to 15 percent.

"This too will release liquidity pressure and finance companies can choose whether or not to adopt these revisions," Cabraal pointed out.

The government is also developing a mechanism in which ceased assets, such as vehicles and machinery, are to be given back to their original owners to be put into productive use. Cabraal said this will ensure that normal economic activities continue.

If none of these helps, Cabraal said the Central Bank will utilize a Medium and Long Term Credit Fund to lend to finance companies. The fund is established with transfers from the Central Bank’s profits and the Monetary Board is yet to decide on implementing the fund.

A special oversight committee is to be appointed by the government to ensure the success of the support package. Cabraal said it would be a three member committee but could not comment on the appointments as they are yet to be made.