The loans to contractors backed by Treasury guarantees can now be considered as part of banks’ liquid assets when calculating and reporting their statutory liquid asset ratio (SLAR) to the Central Bank.
The Treasury in early July decided to issue, what they call, ‘Letters of Acceptance of Payments of Outstanding Bills’ to contractors to facilitate the construction sector to obtain loans under special accounts opened with contractors’ banks.
The letters, which are directly issued to the respective banks, are issued to settle the outstanding dues to the contractors, who had carried out various State development projects in the past.
Licensed banks are required to maintain a minimum of 20 percent of their deposit liabilities in liquid assets, which typically consist of Treasury bills and bonds. With the new directive, now the banks can also count the loans provided under Treasury guarantees to contractors as liquid assets as the latter undertakes to settle loans given by banks.
This could for a certain degree relieve the banks of the need to provide additional assets as part of mandatory liquid assets and thereby release more funds for lending and ease cost of funds.
This is because banks are less required to depend on customer deposits to fund their loans as they borrow money under the Central Bank refinance scheme to lend to their customers, for which they do not require to keep liquid assets.
A new Banking Act direction gave instructions to the banks to consider such loans provided to the construction sector under the Treasury guarantee as part of the banks’ liquid assets until December 31, 2020, subject to a haircut of 10 percent of such credit facilities.
“Licensed commercial banks shall consider the new credit facilities granted to the construction sector against ‘Letter of Acceptance of Payments of Outstanding Bills to Contractors’, issued by the government as referred to in the Operating Instructions No. 35/03/023/0001/002 or any other subsequent amendment issued by the Domestic Operations Department of CBSL, as liquid assets for the purpose of computation of Statutory Liquid Assets Ratio (SLAR), until 31 December 2020, subject to a haircut of 10 percent of such credit facilities,” the direction stated.
Mirror Business earlier reported that such credit facilities plus the loans granted under Central Bank’s credit guarantee scheme to be relieved from the need to risk weight against banks’ capital as they carry ‘zero’ risk from a credit risk standpoint, as all such facilities are guaranteed by either the Central Bank or the Treasury.
Meanwhile, the Monetary Board recently decided to broaden the sectors to include pharmaceutical and other identified sectors as part of the arrangement to make it possible for them to borrow from the refinance scheme against the unsettled bills form the government.
Typically when the Treasury issues a ‘Letter of Acceptance’ to contractors, banks bring them to the Central Bank to borrow at 1 percent under the refinance scheme, and then such funds will be lent to contractors at 4 percent for 180 days.
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