Sri Lanka sets up enforcement unit after insolvency failures

The Central Bank of Sri Lanka has set up a new enforcement division in a bid to address earlier mistakes when restructuring four failing financial institutions. As part of the central bank's efforts to improve practices, resolution plans for the banks have now received approval.

The new division will sit in the department of supervision of non-bank financial institutions with responsibility for instituting legal action against directors and managers responsible for the "fraud and misappropriation of funds", the central bank said in a statement.

The enforcement division will also introduce "routine procedure" when it comes to taking legal action against parties who have committed similar fraudulent practices in existing companies. "Action will be taken to address lapses in the central bank and to strengthen regulatory and supervisory mechanisms on a priority basis to ensure the safety and soundness of existing functions," the Central Bank of Sri Lanka said.

Up and running

Legal action by the new division is already under way against Entrust Securities, a primary dealer in government securities that suffered a "chronic liquidity and insolvency crisis" during the latter part of 2015.

The central bank said the "fraudulent" use of funds placed by customers for investment in government securities led to the institution being "suspended" by the regulator. Its operations were vested in the National Savings Bank to protect investors.

A resolution plan was designed for Entrust earlier this year, along with plans for Standard Credit Facility, City Finance Corporation and Central Investments and Finance, which also encountered financial difficulties.

"All three companies got into a chronic financial position in 2008 and 2009 due to fraud and mismanagement of funds and, therefore, these companies did not have assets to pay off deposits," the central bank said in a statement.

All restructuring efforts made by the Central Bank of Sri Lanka were deemed as not having produced the "envisaged results", with the management of the companies failing to secure new infusions of new capital. "As a result, these companies became insolvent" and have been "out of business since then" the central bank said, admitting there was no way to "revive" them.

"In respect of unsecured investments in the Entrust amounting to Rs.8.5 billion ($57.7 million) belonging to 24 individuals and entities, government securities will be allocated and be repaid under the repayment plan to be implemented with the managing support of the Seylan Bank," the central bank said.

Investments secured with government securities – amounting to Rs.3.1 billion belonging to 107 investors – will be settled in the "coming weeks". This decision was made by the central bank's monetary board on October 14.

The remaining three finance companies have since been ordered to repay Rs.4.86 billion to 11,878 depositors. Once the repayment plans for these four institutions are legally finalised, the bank explained, the companies will be "dealt with through applicable laws for liquidation".

"The monetary board is of the view that this is the only option that now remains," the central bank said.