The Amendments also updated the Finance Lease Act introduced five years ago to bring down the capital required to run a specialized leasing company.
Securitisation, a popular mode of raising money for leasing businesses, has been picking up over the last few years despite a legal bottleneck that prevented the assigning or 'True Sale' of assets.
In a securitization deal, good quality lease receivables are assigned to a legally separate Special Purpose Vehicle against which the leasing company borrows.
The loan is paid back with the cash flows generated by the assets assigned to the SPV.
The leasing firm is able to lower the cost of its borrowing by this method as the risk attached to the SPV defaulting is lesser than leasing company's risk rating.
However, the law only allowed assets to be assigned to other leasing companies.
It also did not allow for the lease payments to be channeled anywhere else except to the lessee, or company that grants the lease.
To do a true securitization legal title including the cash flows generated by the assets have to be transferred to the SPV.
To overcome the inability of transferring the cash flows and assets to the SPV the local industry was effectively doing a mortgaging of the receipts.
The amended Act will allow assets and related cash flows to be assigned, providing no legal recourse to the lessee to claw back the assets.
However, the Act has appointed the Central Bank as a regulator to the securitizing market by making it mandatory for all future deals to be approved by them.
Analysts welcomed the moves saying leasing establishments that don’t meet prudential requirements can be regulated this way.
Removing the legal hurdles they also expect will clear the way for more deals especially since interest rates are on an upward swing.
Industry watchers say leasing establishments were borrowing short to finance long-term assets because of the lower interest rates.
However, the recent upswing in rates is forcing borrowers to lock low rates for the long term with securitization deals.
The Act has left room for the finance minister to specify a lower than the current Rs. 75 million minimum capital for specialized leasing companies.
Two specialized leasing firms; Isuru Finance and Kaido Leasing have taken the regulator, the Central Bank to courts over the minimum capital rule.
Sri Lanka has 20 registered specialized leasing companies and 28 finance companies and 19 licensed banks that give leases.
-LBR Newsdesk: LBOEmail@vanguardlk.com