Monetary Board issues fresh criteria for finance firms when borrowing from abroad

• CB says move aimed at minimizing unwanted sector volatilities 
• And also to provide risk management framework to deal with such borrowings 

A fresh set of criteria was issued by the Monetary Board in respect of future borrowings made by the licensed finance company sector in foreign currency in order to minimise unwarranted volatilities in the sector and also to provide a risk management framework when dealing with such borrowings.   

To this end, the Monetary Board has issued a fresh guideline to be followed when seeking foreign currency funding, with specific limits in foreign currency borrowings attached to assets and purpose of such borrowing made. 

Hence, the new limits of foreign currency borrowings will be defined as a percentage of total assets under each purpose for which such funds are raised, and all such borrowings must also be for two years or more, the new guidelines stipulate. 

Further, the Monetary Board also has come up with a set approvals required at different levels of foreign currency raised for different purpose or criteria, from a minimum of keeping the Director of Non-Bank Supervision informed, to obtain prior approval of the Monetary Board. 

For instance, if a licensed finance company is raising foreign currency funding equivalent to 10 percent or below of its total assets for the purpose of meeting prudential requirements such as meeting minimum capital adequacy ratios, minimum core capital levels or the liquid assets requirements, such a company must notify the Director of Department of Supervision of Non-Bank Financial Institutions, prior and after obtaining such borrowings. 

However, if such borrowings constitute to between 10 and 15 percent of the borrower’s total assets raised for other purposes on top of meeting prudential requirements, such as maintaining a capital conservation buffer of 1 percent in addition to minimum capital adequacy ratio, such borrowers should get prior approval of the Director of Non-Bank Supervision. 

Further, the licensed finance companies having a publishable credit rating of investment grade (BBB-) or above can also make borrowings at this level after obtaining Director’s prior approval. 

However, when a company’s new foreign currency borrowings reach between 15 to 20 percent of total assets, raised for solely to lend/invest for the purposes of exports, import substitution, government development projects, small and medium enterprises, projects generating foreign income or any other sector deemed priority sector as determined by the Monetary Board, it must seek the prior approval of the Monetary Board before making such foreign borrowings. 

Further, the Monetary Board’s prior approval is also required when such borrowings are unsecured, and subordinated to the claims of depositor - i.e. any claims by the foreign lender in case of a liquidation of the finance company come after all claims of the depositors are met. 

However, any licensed finance company, which has already obtained foreign currency borrowings in excess of the maximum limits freshly specified, is permitted to service the existing arrangements.