The Central Bank of Sri Lanka (CBSL) has now taken steps to settle all maturing Sri Lanka Development Bonds (SLDB) in local currency (Sri Lankan rupee), a CBSL official told Finance Today.

‘We have already made the related payments in local rupees for SLDBs that have matured up to 1 August’ he said. A CBSL official further said based on the value of the investment portfolio they have been given certain dates to settle the full amount.

Meanwhile, top officials of the banking sector say that the banking sector might face a small ‘haircut’ (Debt reduction) for investments made in SLDBs. ‘It might have a minimal impact on the banking sector,’ they predicted.

‘CBSL has already settled a majority of our matured SLDBs in rupees and agreed to settle the balance, 9-10% in the coming days but there was an uncertainty over 5% of our matured SLDB settlements’, the bankers said.

In the meantime, it is also reported that some SLDB holders have refused to receive their maturing investments in rupees. The CBSL has given them an opportunity to reinvest them only in treasury bonds.

All SLDBs are due to mature in 2024. Senior officials of the Ministry of Finance (MoF) and CBSL emphasised to Finance Today that there is no need to restructure the domestic debt at this moment.

Sri Lanka Development Bonds, (SLDB) Treasury bonds and Treasury Bills are Sri Lanka’s main local debt instruments. It has been observed that there is no need to subject them to a restructuring process as these have been issued on a short to medium-term basis. Due to the existing inflation conditions and depreciated exchange rate conditions, local debt sources have already undergone some self-restructuring in a background where their original investment values have now deteriorated.

Therefore, there is no risk of additional restructuring of domestic debt, the MoF and the CBSL have observed. In compliance with the proposed debt restructuring plan in Sri Lanka, many Banks have already made provisions of around 20 per cent for their International Sovereign Bonds (ISB) and SLDB holdings and are expected to provide further provisions depending on the final debt restructuring proposal. Relevant Bank officials told Finance Today that ISB holders will likely see a 35-40% ‘haircut’ on holdings of ISBs, if they participate in the debt restructuring plan. Meanwhile, a top Singaporean Law firm, Baker McKenzie Wong and Leow, which is a joint law- venture between Baker McKenzie and Wong and Leow LLC, has been appointed as the Common International Legal Counsel to protect the interest of eight Sri Lankan commercial banking sector International Sovereign Bonds (ISB) holders. According to these sources, eight Sri Lankan Banks namely: Hatton National Bank PLC (HNB), Commercial Bank of Ceylon PLC (ComBank), Seylan Bank PLC (Seylan), National Development Bank (NDB), Nations Trust Bank PLC (NTB), DFCC Bank PLC (DFCC), Sampath Bank PLC (Sampath) and Pan Asia Banking Corporation PLC (PABC) have collectively invested around US$ 1.5 Billion in ISBs.

However, the Bank of Ceylon (BoC), which has over USD 240 million ISB holding and considering their State-ownership, has decided not to join this endeavour. On 12th April 2022, CBSL declared temporary debt suspensions for dollar denominated foreign debts pending the completion of the Government’s discussions with the International Monetary Fund (IMF) and the preparation of a comprehensive debt restructuring program covering obligations. However, CBSL announced that Sri Lanka’s domestic and foreign creditors who can apply to receive suspended debt repayments in rupees under an interim policy, could also be paid in bonds as an alternative repayment method.

Sri Lanka Development Bonds (SLDBs) is a debt instrument denominated in US Dollars issued by the Government of Sri Lanka. Interest is paid to the holder every six months and the principal repayment is made at the end of the maturity period.

CA Sri Lanka Issues New Direction for Banking Sector Debt Portfolio Investments

The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) has decided to temporarily relax its accounting policies in relations to Banking Sector Debt Portfolio investments.

Therefore, considering Sri Lanka’s unprecedented changes in the macro-economic scenario, CA Sri Lanka has issued the ‘Statement of Alterative Treatment (SoAT)’ on the classification of Debt Portfolio such as Treasury Bonds and Sri Lanka Development Bonds. This SoAT will provide a temporary practical expedient to permit entities to reclassify the debt portfolio measured at Fair Value through Other Comprehensive Income (FVTOCI) for Amortised cost,’ the relevant directive stated.

 This SoAT is applicable only to debt portfolios currently classified as FVTOCI and should not be applied to portfolios classified as Fair Value through Profit or Loss, it stated. Furthermore, in addition to the alternative treatment given in this SoAT, entities must continue to comply with all other provisions of Sri Lanka Accounting Standards (SLFRS/ LKAS).

By Ishara Gamage