Banks provide...
At the onset of the pandemic, the international credit rating agencies and a large chorus of analysts warned of a significant increase in non-performing loans in the Sri Lankan banking system. However, as the first round of the moratoria, the banks fared well in their asset quality as they managed to bring down their non-performing loan ratios. The banking sector gross nonperforming loans ratio fell from 5.4 percent in June 2020 to 5.3 percent in September and further to 4.9 percent by December 2020.
This was also when the loans under moratoria out of total loans fell to only a fraction, from high levels in April 2020. For instance, Commercial Bank of Ceylon PLC, the largest private lender in the country, said nearly 35 percent of its loans under moratorium fell to 16 percent by the year-end. Making its highest ever provision for credit costs to the tune of Rs.21.5 billion, which was a 94.2 percent increase from 2019, Commercial Bank said that its total impairments “include additional provisions made for expected credit losses as a management overlay of Rs.5.189 billion to account for potential losses that the existing impairment models may not be capturing due to high level of uncertainty and volatility created by the COVID-19 pandemic”.
At National Development Bank, loans under moratorium, which were at 40 percent of the total loan book at the second quarter, fell to 26 percent by the end of the year, “mainly due to settlement of revolving facilities”.
The banks assumed the worst case macroeconomic outlook when measuring collective impairments under the Expected Credit Loss model, resulting in higher impairment provisions. Hence, a resurgent economy with normalising cash flows at the micro and small business levels, will lead to some of these provisions to reverse, giving a windfall for the bank profits in 2021.