Credit Risks

Oct 29, 2010 (LBO) – Other than Sri Lanka’s government Treasury bills, which was free of credit risk, other types of investments even in banks and finance companies regulated by the Central Bank had different levels of risk, Governor Nivard Cabraal said. To educate the public about the level of risk in each institution the Central Bank had required them to get a rating, he said.

Ratings above ‘BBB-‘ are considered lower risk or ‘investment grade’ and others ‘speculative’.

But less risky institutions with stronger balance sheets gave lower returns.

Finance companies for example give higher rates but depositors should be aware that there was a higher level of risk. Some unregulated institutions promised even higher yields but they had very high levels of risk.

“If someone invests in unregulated for 40 percent thinking they can recover their money in two years, and also avoid paying taxes they cannot come to the central bank,” Cabraal said.

But the central bank intervened in regulated institutions when they got into difficulties.

The central bank had intervened in the case of Seylan Bank and several finance companies where there were ongoing efforts to resolve problems.

But blanket bailouts had to be borne by tax payer f