NPA levels of Lankan banks to rise: Report

Non-performing asset (NPA) levels of Sri Lankan financial institutions in gold-backed portfolios such as pawning could increase to 3 percent if gold prices drop to US $ 1,000 per ounce, a research report pointed out.

Citing a 23 percent drop in gold prices in 2013, down to US $ 1,282 per ounce, a report by CT Smith Stockbrokers noted that a continuous decline in gold prices is expected to reduce the financial system’s dependency on pawning as a method of increasing asset yield in the short to medium term.

“The tendency to default on a pawning facility increases in a declining gold price environment as the value of collateral declines below the pawned loan value and as margin top up requirements kick in.

With gold prices falling in the second quarter of 2013, loan to collateral value in pawning portfolios of all financial institutions are expected to deteriorate significantly,” the report stated.

Nevertheless, CT Smith noted that NPAs from the pawning sector are not expected to pose a serious threat to the financial system, owing to the short tenure of pawning.

Subsequent to plunging gold prices, many financial institutions in Sri Lanka, including market leader, state-owned People’s Bank, had taken steps to reduce their exposure to gold, curtailing promotions of gold-backed loans.

People’s Bank maintained a significant exposure to pawning with a hefty Rs.250.8 billion in gold-backed lending at the end of 2012, amounting to approximately 33.9 percent of its total advances.

Meanwhile, Bank of Ceylon had an exposure of Rs.142 billion, approximately 20 percent of total advances while Sampath Bank was reported to have an exposure of Rs.54.9 billion or 25.3 percent of advances. According to Reuters, spot gold was down 0.6 percent at US $ 1,284.81 an ounce yesterday, while U.S. gold futures for August delivery were down US $ 6.80 an ounce at US $ 1,283.60.

Gold has fallen nearly 23 percent this year, hurt by fears the US Federal Reserve is set to curb its quantitative easing measures, which have driven gold to record highs in recent years. The Fed has indicated that it might taper the quantitative easing programme by trimming its bond purchases.