Sri Lanka to set up a bad loans company

Finally a Financial Asset Management Companies Act. The article title is incorrect. What does it mean to us?

Securitisation may finally be possible for all Banks and Finance Companies - not just the current few. Oversimplified explanation: group assets, rate them, sell them to investors - taking account of recovery action. (Banks have extra judicial recovery rights which these asset managers may not).

Hopefully I get to use the learning from my LL.M. dissertation on "What structured financial instruments are permitted by the Regulatory Framework in Sri Lanka". 

Learn more about Securitization

ECONOMYNEXT – Sri Lanka will set up a company to manage bad loans in banks President Ranil Wickremesinghe said as a currency crisis has hit consumer demand and interest rates are soaring after macro-economists printed money to target an output gap.

“I propose to introduce a new Financial Asset Management Companies Act to enable banks and finance companies to separate and transfer their nonperforming bad assets to an asset management company,” President Wickremesinghe said presenting a budget for 2023.

“This will smoothen the resolution process of financial institutions by creating a swift removal of
bad debts from an affected institution.”

Asset management companies will take away bad loans at a discount and will focus on recovering debt.

Banks sometimes have to be recapitalized, sometimes at government expense, for the losses.

Banks are also facing the possibility of losses from domestic debt re-structuring on top of mark to market losses.

Banks with international sovereign bonds also face losses.

Sri Lanka’s currency collapsed from 200 to 360 to the US dollar in the worst such crisis in the history of the island’s Latin America style central bank.

However infltion also soared to around 70 percent by October 2022. (Colombo/Nov14/2022)