November 30, 2021

Central Bank relaxes Foreign Currency Borrowing Restrictions on Finance Companies

2 min read

In order to provide flexibility for Licensed Finance Companies (LFCs) to obtain low-cost funding from foreign sources to support their business expansions, the Monetary Board of the Central Bank of Sri Lanka (CBSL) has issued fresh directions relaxing existing restrictions on foreign currency borrowings by LFCs.

“The objectives of these directions are to stabilize any financial volatilities created by the foreign funding exposures of LFCs and provide a risk management framework for such foreign currency borrowings,” the Regulator said.

Prior to these directions, CBSL permitted LFCs satisfying criteria such as utilization for purposes with national interest, maturities over 5 years, complying with the prudential requirements, etc. to raise foreign currency borrowings on a case-by-case basis up to 10 percent of total assets.  

Under the new directions, LFCs are allowed to borrow foreign currency up to 20 per cent of a company’s total assets under three stages based on the overall performance of each company including capital and liquidity levels, utilization purposes, nature of collaterals and the credit rating.

Also, any foreign currency borrowings up to 10 per cent of a company’s total assets do not require CBSL approval except prior notification, while the borrowings exceeding 10 per cent require prior approval of CBSL.

The tenure of the foreign currency borrowings needs to be a minmum of 2 years .

The CBSL has facilitated the hedging of foreign exchange risk of the loan proceeds through the Licensed Commercial Banks, while LFCs are required to manage the foreign exchange risk of loan interest payments through appropriate derivative products.

Moreover, LFCs are required to maintain the cost of such foreign currency borrowings within the limits stipulated by CBSL.

The CBSL expects that the new directions to provide greater flexibility to LFCs to raise funds from foreign sources in a prudent manner for their future business expansions which in return would support economic development activities.

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