Banks provide even for loans under moratoria taking extra guard for possible losses

Sri Lankan banks became extra cautious and extremely prudent when accounting for the losses that might arise from the possible bad loans on the facilities that were on moratoria through March 31, 2021, when they closed their books for the last financial year, making them better guarded should such loans fall bad.

As part of the broader package of relief to the financial sector to deal with the pandemic-induced stresses, the banks were asked to hold off categorising loans under moratoria as impairments or nonperforming loans.

Further, in October, the Central Bank issued guidelines asking the banks to exercise judgement when determining facilities exposed to COVID-HIT sectors as ‘Stage 3 facilities’, a term used in the International Financial Reporting Standard 9 for non-performing loans.

However, the banks did more than what was required and provided for even such loans, which were under moratoria through March 31, 2021, as they had adequate profits to absorb even higher losses.

“… given the sluggish movement in the overall advance portfolio and the debt moratoriums extended during the year 2020 and also considering the potential impact that could arise once the debt moratorium phase II lapses in March 2021, it was decided to recognise a material impairment provision as an allowance for overlay, in 2020,” Sampath Bank PLC in relation to its financial accounts for the year ended on December 31, 2021 said.

“Taking into consideration the loans under moratoria and the impact once the moratorium period ends in March 2021, a significant allowance for overlay was taken into account,” said Hatton National Bank PLC in its annual report.