Two apartment builders blacklisted by major banks

At least two apartment builders have been refused credit facilities by major banks as their companies are over extended in loans, banking sources say.

These two builders are rapidly expanding – especially in the outskirts of Colombo, they said adding that their companies are finding it difficult to sell units. Most apartments are financed through presales, but during the past year it has been hard for many builders to sell their units owing to many macro factors. This has seen a slow growth in this sector during the last few months with many banks curbing their lending to the real estate sector.

Private commercial banks, which control about 75 per cent of the market, offer adjustable-rate mortgage loans. Most bank’s housing portfolios grew by double digits last year but they are exercising caution especially after the Central Bank (CB) in June said in a letter to the International Monetary Fund (IMF) that they aim to deploy, as needed, macro-prudential tools such as a sector- specific limit on the loan-to-value ratio including in the construction and real estate sectors. The CB in its policy statement issued in August said that private sector credit growth indicates clear signs of deceleration in recent months, although at a slow pace and added that it expects a modest economic recovery over the coming quarters. Private sector credit growth is the increase in the amount of credit that banks lend to the companies, businesspersons, individuals, institutions, etc either in the form of retail loans or institutional loans or any other form of loan or credit.

Analysts say that thin capitalisation could take on bigger implications as the local banks shift towards meeting the Basel III requirements set to come into effect at the beginning of 2019. Under the require- ments of Basel III, local banks will have to maintain a minimum of 7 per cent in risk-weighted assets under common equity Tier-1, Tier-1 capital of at least 8.5 per cent as well as total capital of at least 12.5 per cent.

Ratings agency S&P recently cautioned about the risk to capital buffers in banks stemming from high loan growth, which it said could negatively impact banks’ waning capital levels.