Lankan banks told to be ruthless with borrowers if NPLS continue to rise
The Sri Lankan banks may still be far from a full-blown non-performing loan (NPL) crisis. But cracks are appearing in the asset quality with the rise in sour loans, hindering the banking sector’s future growth prospects.
If the negative development persists, Brian Mcenery, a Director at Ireland’s specialist non-performing loan bank, NAMA—THE world’s biggest ‘bad bank’—advises Sri Lankan banks to become “ruthless with the borrower”.
“Sri Lanka’s banks are nowhere near a crisis. Nonetheless, what every bank needs to do is what I would call ‘a ruthless branch review of (all) of their lending’. And it needs to be done at a very granular level,” Mcenery said during a brief chat with Mirror Business, last week, in Colombo. Sri Lanka’s banking sector’s reported non-performing loans have been rising since end-2017 in response to the tightened monetary and fiscal policies and the demand for new loans has become weak due to higher rates, lower disposable incomes and not so favourable investment climate characterised by political volatility.
The reported gross NPL ratio of the banking sector reached 3.3 percent by end-may 2018, from 2.5 percent in December 2017 and 3.2 percent in 2015.
The last time the reported gross NPL ratio reached such proportions was in 2014, when the ratio hit 4.2 percent in the aftermath of the gold-back loan crisis, which eroded billions of profits and capital from their books.
While the reported NPL ratio hovers around the 3.3 percent level, the Central Bank is of the view that the potential NPL ratio could be much higher in the range of 4.5 percent, including the rescheduled loans. The rescheduled loans have recorded a steep increase since November 2017, whereby the growth accelerated from a sheer 5.0 percent on a year-on-year basis to 45 percent in May 2018.
When asked what exactly the Sri Lankan banks should do to arrest the situation before it snowballs into a crisis, Mcenery said the banks need to undertake stress testing at a very granular level, to identify which sectors are particularly vulnerable and which facilities are in trouble.
After identifying those loans, the banks need to start provisioning against the profit, which however erases the bank’s capital base, he said.
Mcenery, who is also the former President of the Association of Chartered Certified Accountants, stressed that the banks need to strike a balance between the capitalisation and lending and pointed out the importance of sticking to the new Basel III rules on capital and leverage and the new accounting standard on financial instruments, IFRS 9. NAMA’S Mcenery believes Lankan banks are nowhere near a crisis But calls for ruthless branch review of all of their lending Lankan banks’ NPLS have
been rising since end-2017 NPL ratio reached 3.3% by end-may 2018, from 2.5% in December 2017 CB believes potential NPL ratio could be around 4.5% with rescheduled loans