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Central Bank resolves the insolvent companies issue  under bank debt restructure scheme    

May 25, Colombo (LNW): Sri Lanka’s insolvent companies are to be allowed to continue operating following the government’s decision of enabling creditor banks to avoid declaring bankruptcy of such entities, finance ministry sources disclosed.  

Business owners with insolvent enterprises have been given an opportunity to renegotiate and/or extend the terms of the loans taken by them from banks although permitting these firms to continue operating poses a significant impediment to growth and economic efficiency.   

These firms are to be made efficient or productive to remain competitive in the local market at a time where Sri Lanka is emerging from the economic crisis to a stronger and more resilient economy, a high official of the ministry said. 

The challenging macroeconomic environment that prevailed during the recent years disrupted many business entities, limiting their income-generating capabilities and hence forcing them to default on timely payments of loans, which resulted in impairing the recovery process of licensed banks (LBs).

As evidenced by the increase of non-performing loans of LBs from 5.2 per cent at end-2019 to 13.6 per cent by the end of 3 Quarter in 2023, which marginally improved later to 12.8 per cent by the end of 2023, the credit quality of the banking sector has deteriorated significantly, Central Bank’s economic review report 2023 revealed.  

The Central Bank has recently issued guidelines to Business Revival Units (BRU ) set up in banks for  the using of  financial and/ or operational restructuring tools and techniques or any combination thereof to revive distressed but viable businesses.

Financial restructuring tools would include debt forgiveness, debt rescheduling including grace periods for the payment of principal and interest, adjustment of interest rates, maturity extensions, and provision of new financing, including interim financing and exit financing, it added..

Under operational restructuring, the BRU is to consider proposing fundamental changes in the business’s operations or assets to restore commercial viability, developing a new business plan/strategy.

It is also aimed at enhancing operational efficiency and profitability of such businesses, improving cash management systems, reviewing pricing strategy, and reviewing customer retention and/or acquisition strategies. 

A framework for corporate workouts is a newly introduced mechanism as an overarching structure for a mutually agreeable business revival plan between a borrower and multiple banks as creditors. 

Since this is a mutual agreement between parties, a court intervention would not be required to loan recovery , CB pointed out

As per the proposed business revival mechanism of LBs, it is expected that distressed borrowers who are engaged in business activities will be able to revive their businesses with the guidance of LBs.

it will  improve cash flows will be utilised to repay their non-performing loans and thereby improving asset quality of the banking sector, Central Bank report indicated. .

Further, with the improvement in the macroeconomic environment of the country, the revival of businesses, especially the Micro, Small & Medium Enterprises (MSMEs), would promote sustainable economic growth and employment opportunities and hence, contribute to the sustained development of the national economy, it predicted .

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