Solvency Tests

April 28, 2008 (LBO) – Sri Lankan finance companies should reduce maturity mis-matches between their assets and liabilities an official said. When interest rates go up the value of fixed rate assets come down,
said Naomal Goonewardena, partner, Nithya Partners.

He was speaking on the legal responsibilities of directors of finance
firms at a seminar organised by the central bank to make directors of
registered finance companies aware of regulations and their governance
and legal responsibilities last week.

Commercial banks may not have much of a mismatch between their assets
and liabilities but finance companies’ asset-liability mismatches are
much greater.

The finance firms have 4-5 year lending and hire purchase agreements
while their liabilities are one-year and three-month fixed deposits.

“In that scenario, with increasing interest rates, if you take the
fair valuation of assets, you might actually find out that solvency is
not a true reflection of actual solvency margins.”

The Sinhala version of the company law says a company ‘shall’ take
into account fair value, he added.

He said the solvency posit