Bad loans at Sri Lanka’s commercial banks falling and profits rising
COLOMBO: Bad loans at Sri Lanka's commercial banks are falling, and profits are rising and credit growth is picking up as the economy recovers and a leaves behind the effects of a burst bubble, a report by the island's banking regulator shows.
Bad loans at Sri Lanka's 22 commercial banks increased to 8.2 percent of total loans in 2009 from 6.0 percent in 2008, but had fallen to 7.0 percent by June 2010, a report by the Central Bank shows.
Loans went bad in 2009 after interest rates rose above 20 percent to defend Sri Lanka's unstable 'soft-peg' with the US dollar, bursting a bubble fired by money printing and deficit spending since 2004.
But Sri Lanka's sub-prime finance company sector which is more exposed to property suffered more than commercial banks, which are cautious about lending long-term due to profligate fiscal policy and loose monetary policy which makes interest rate extremely volatile.
Profitability measured by return on assets, which fell to 1.7 percent in 2009 from 2.0 percent a year earlier had increased to 2.8 percent by June 2010.
Return on equity (after tax) had increased to 23.4 percent by June 2010 after falling to 11.0 percent in 2009 from 14.8 percent a year earlier.
Pre-tax profits had risen to 35 billion rupees at the 22 commercial banks by June 2010 up 48 percent from 23.8 billion rupees a year earlier.
Profits from fund based activities had increased 14.0 percent by fee based income had grown by just 3.0 percent with foreign exchange income falling 7.0 percent.
Sri Lanka's rupee appreciated against the US dollar and a tighter peg also reduced volatility, since a balance of payment crisis ended in April 2009.
Total capital adequacy ratio at commercial banks fell to 15.2 percent by June 2010, from 15.4 percent in 2009, after climbing from 13.8 percent in 2008.
In 2009 banks stopped lending to risky private borrowers and started financing the government deficit which expanded to 10 percent of gross domestic product.
Gild-edged government securities free risk-weighted capital, allowing capital adequacy to rise even as bad loans increase. Up to June credit has expanded 122 billion rupees, up 8.7 percent, from a 2.8 percent contraction a year earlier.
Bad loans at Sri Lanka's licensed specialized banks, which do not have current account facilities unlike commercial banks, were still rising slowly, though profits were recovering strongly.
Non-performing loans at licensed specialized bank rose to 10.5 percent of gross loans by June 2010, up from 10.4 percent in 2009. In 2009 bad loans rose sharply from the 8.9 percent, a year earlier.
But profitability at Sri Lanka's 14 specialized banks, measured by return on assets rose to 4.7 percent by June 2010, up from 2.4 percent in 2009. In 2008 return on assets was only 1.4 percent.
Return on equity rose to 39.2 percent by June 2010, up from 15.1 percent in 2009 and 6.9 percent in 2008. -PB News
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