SL’s banking sector remains under high risk category: Fitch

Despite the deceleration of private sector credit during 2012 and 2013, Fitch Ratings (Fitch) still believes the Sri Lankan banking sector is susceptible to risks and thus decided to leave the country’s financial system under the high risk category assigned two years ago.

“The private credit-toGDP ratios are much lower in both Indonesia and Sri Lanka, but system-wide credit growth has been strong – and triggered the highest score on Fitch’s MPI of 3, which suggests a high risk of potential systemic stress in a banking system,” Fitch said issuing its 2014 Outlook on Emerging Asian Sovereigns last week.

In December 2011, Fitch assigned a Macro Prudential Index (MPI) score of 3, the high risk category allocated to Sri Lankan banking sector triggered by two years of rapid lending growth and real equity price growth.

In 2010 and 2011, the credit to the private sector on average grew by 15 percent and equity prices grew by 17 percent. This high risk category is most likely to be maintained through 2014.

“In 2011, Sri Lankan banks breached those triggers and as a result went in to MPI 3. Even though there was some deceleration in the credit growth in 2012 and 2013 as a result of the monetary tightening measures, till 2014 we expect this to be the case,” said Senior Director, Head of Financial Institutions, South & South East Asia at Fitch, Ambreesh Srivastava last August. Data shows that in years 2012 and 2013, credit extended to the private sector have contracted in relation to GDP as well on previous year's loan book balance. Private sector credit as a percentage of GDP was 29.5percent in 2013, falling from 31.1 percent in 2012. Meanwhile credit to private sector also grew by a paltry 8.0 percent last year from 23 percent growth in 2012. The figure was as high as 35 percent in 2011 partly associated with the low base. Sri Lankan authorities in 1Q12 brought a broad set of policy tightening measures including a credit ceiling to curtail the excessive import-led credit demand leading to a Balance of Payment crisis.