Lankan bank­ing...

Daily Mirror (Sri Lanka) - - HEALTHCARE -

The re­ported non-per­form­ing loan (NPL) ra­tio of the bank­ing sec­tor hit a high of 3.0 per­cent in Fe­bru­ary 2018, up from 2.8 per­cent in Jan­uary and 2.5 per­cent in De­cem­ber 2017.

The rat­ing agency cau­tioned that the NPL sit­u­a­tion could con­tinue to de­te­ri­o­rate in 2018 but said it is un­likely to be sharp as Sri Lanka’s growth prospects re­main favourable.

“This is a fall­out of banks’ ag­gres­sive growth in the past few years and Sri Lanka’s drought in 2016 and flood­ing in 2017, which dis­turbed the agri­cul­ture sec­tor and agro-based in­dus­trial ac­tiv­ity,” S&P said.

The rat­ing agency’s de­ci­sion to re­vise Sri Lanka’s eco­nomic risk trend to ‘sta­ble’ from ‘neg­a­tive’ comes amid ex­pec­ta­tions of be­nign macroe­co­nomic con­di­tions as the eco­nomic im­bal­ances from ag­gres­sive growth in the past are ex­pected to re­cede go­ing for­ward.

Fol­low­ing the end of the 30-year civil war in 2009, the Cen­tral Bank re­duced in­ter­est rates to stim­u­late eco­nomic growth through cheap bank credit. But the ar­ti­fi­cial push only re­sulted in cre­at­ing credit and as­set bub­bles.

Fur­ther, the coun­try was plunged into bal­ance of pay­ment and the ru­pee weak­ened from around Rs.110 to Rs.157 against the US dol­lar. “While we ex­pect loan growth to re­main higher than nom­i­nal GDP growth, the gap has nar­rowed, re­duc­ing risks of a fur­ther build-up of eco­nomic im­bal­ances. More­over, the sovereign ex­ter­nal po­si­tion con­tin­ues to sta­bi­lize,” the rat­ing agency added. Sri Lanka’s pri­vate credit has eased now and is ris­ing at around 14.6 per­cent lev­els, com­ing down from around 22 per­cent a year ago.

Com­ment­ing on the fund­ing pro­file, the rat­ing agency said it would con­tinue to be sup­ported “from a good level of sta­ble core cus­tomer de­posits”.

Mean­while, at a time when the con­sen­sus is build­ing up to­wards bank­ing sec­tor con­sol­i­da­tion, S&P doesn’t think that a large num­ber of banks rel­a­tive to the econ­omy’s size has led to a sig­nif­i­cant in­sta­bil­ity in the com­pet­i­tive en­vi­ron­ment.

“We be­lieve that larger banks with strong fran­chises will con­tinue to dom­i­nate the sec­tor.

How­ever, the dom­i­nance of gov­ern­ment-owned banks and di­rected lend­ing to the agri­cul­tural sec­tor some­what dis­tort the com­pet­i­tive en­vi­ron­ment, in our view.”

Com­ment­ing on the reg­u­la­tory en­vi­ron­ment, S&P said al­though the Cen­tral Bank’s reg­u­la­tory over­sight has im­proved over the years, they re­main weaker than that of in­ter­na­tional peers. As the Cen­tral Bank has re­cently dou­bled the min­i­mum cap­i­tal of li­censed bank by 2020, S&P con­fided that these mea­sures would en­sure stronger bank­ing sys­tem by way of good cap­i­tal buf­fers to ab­sorb un­ex­pected losses.

In this jour­ney, S&P ex­pects the Sri Lankan banks to step up cap­i­tal is­suances – in­clud­ing hy­brid in­stru­ments.

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