CENTRAL BANK vs LEASING COMPANIES
Posted on June 16th, 2020

By M D P DISSANAYAKE

The registered leasing companies are under legal obligation to carry out the latest round of instructions of the Central Bank, as directed by President.

But unregistered leasing companies are not bound by the rules of the Central Bank  as such the Central Bank also cannot enforce the new rules on them. But the unregistered leasing companies cannot continue their operations, without cash inflow.  As they are unregistered, some commercial banks and financial institutions have entered into agreements with these companies to provide the working capital.   It is also evident  that these companies have been importing three wheelers based on usance letters of Letters of  Credit, with 90 to 180 days payback period, based on approvals granted by the first-class commercial banks, to endorse the Letters of Credit. But most of these imports were based on Sight Letters of Credit as well.

The Banks hold the vehicles as collaterals  and the leasing companies are duty bound to their lending institutions to seize the vehicles  for payment defaults by the Lessees.  The Lessors might have provided personal guarantees or pledged their freehold properties to the Banks  as an additional security.  Under leasing arrangements, the ownership of the property does not pass on to the Lessee, until the final payment and release.

The commercial banks provide working capital to the unregistered leasing companies at very high interest rates, due to risk factors

So, in this issue, the parties involved are commercial banks, lessors and lessees.

The Governments intention is to cut the red tape and offer immediate help to the lessees, so that they can use the vehicles, generate positive cash flow, make their livelihood  and pay back loan instalments.

The following alternatives could be looked at immediately, to provide relief to the aggrieved parties:

1.      The government should guarantee through a  salvage package to the commercial banks which provided funds to the unregistered leasing companies.  This means Banks will have a fall-back for recovery of the debt, if the unregistered companies are unable to pay back principal plus interest;

2.      Immediate release of all vehicles to the Lessees which have been seized;

3.      The government should set up an Interest Subsidy Scheme, so that for a specific period,  interest rates shall become current market rates as equivalent to the rates offered by the registered leasing companies;

4.      The relevant commercial banks should open  Escrow Account ( a Trust Account) for the relevant parties, the Lessee should deposit monthly or periodic repayments to the Escrow Account.  The commercial bank will monitor and manage the account and ensure periodic payments are also distributed  to the Lessors so that they can remain in business;

This ensures, Cash Inflow to commercial banks, Lessors as well as keeping Lessees gainfully employed.

These changes can be incorporated into an Extraordinary Gazette to become effective immediately.

 The changes required for the existing laws can only be amended after the formation of the new Parliament .

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