Banks backtrack concessionary loan disbursement among needy borrowers

Sri Lanka’s commercial banks have backtracked from the disbursement of concessionary loans granted by the government via Central Bank (CB)’s re-finance scheme among COVID-19-affected businesses including MSMEs (medium and small enterprises), a large number of MSMEs complained.

These MSMEs noted that the ground reality is they are finding it difficult to get credit to tide them over a cash flow crunch and banks' strict guidelines including requesting for collateral.

The CB allocated Rs.150 billion through a new refinance facility for the businesses adversely affected by the COVID- 19 outbreak, under the Saubagya ( Prosperity) Loan Scheme.

Despite the extension of a deadline to submit applications for these loans by businesses and SMEs up to 30.09.2020, the banks have slowed down the processing of loan applications to avoid credit risks, several senior managers of banks told the Business Times.

Some of these banks had to suspend the disbursement of loans as they have been caught up in credit exposure and deterioration of asset quality along with a drop in profitability, they pointed out.

They have expressed concern on liquidity issues when getting the refinancing facility from the CB by pledging liquid government securities as collateral to provide loans for cash-strapped businesses and SMEs.

Only 25,365 applications out of 36,489 have been sanctioned for these concessionary loans by August 21 this year, CB data showed.

A sum of Rs. 68.6 billion has been disbursed among them out of the total allocation of Rs.150 billion, according to latest official statistics.

Under these circumstances, heads of banks have already informed the CB that banks cannot be the de-facto relief arm of the state because they are responsible for depositors’ money and are required to follow their prudential guidelines.

Provision of liquid government securities as collateral will affect liquidity ratios of banks, several CEOs of banks complained.

Last week Moody’s Investors Service downgraded the long-term foreign currency deposit ratings of Bank of Ceylon, Hatton National Bank PLC and Sampath Bank PLC to Caa1 from B3, and the banks’ long-term local currency deposit ratings to Caa1 from B2, in line with the downgrading of the country status.

Moody’s expects the banks’ asset quality to worsen significantly as a result of coronavirus disruptions, although the increase in problem loans will not be evident until 2021 because of regulatory forbearance measures, including a moratorium on loan repayments.