Sri Lankan banks feel the pressure of non-performing loans
Sri Lanka’s banking sector will be feeling the pinch of moratoriums and other relief given for debtors of banks to enable them to survive in the present economic crisis triggered by the COVID-19 pandemic, finance and banking analysts said.
Non- performing Loans ( NPLs) of banks are expected to rise to 7.4 per cent within six months this year from 4.9 per cent last year with a drop in credit demand, they predicted.
Bank profitability will be under pressure with low- key loan growth, risk of NPLs, a low interest rate environment and loss of fees.
The prevailing COVID- 19 period will test the stress of the banking sector as to whether it has sufficient capital in order to survive the impact of adverse economic conditions, a senior member of the Association of Professional Bankers told the Business Times.
The Central Bank as the regulator has not yet introduced any measures to support the liquidity status of banks which could come down owing to the non-repayment of loans due to the COVID-19 crisis, he added.
The NPL ratios recorded an increase in the recent past quarters, which will not continue due to the new moratoriums but its impact will be felt in six months’ time, he predicted.
The moratoriums will relieve the financial burden on several sectors; he said adding that it will bring down interest and non- interest income of banks in the next 12 months.
In addition, the Central Bank has eased some NPL classification requirements, and the banks no longer need to classify all credit facilities extended to a borrower as non-performing.
This requirement is applicable when the aggregate amount of all outstanding non- performing loans granted to such borrowers exceeds 30 per cent of total credit facilities.
The risk to banks arising out of rising NPLs has been brought to the notice of the Central Bank, Ceylon Bank Employees Union ( CBEU) President Channa Dissanayake told the Business Times.
He noted that the Central Bank has assured them that it will adopt a supportive stance through relaxation on regulations especially on liquidity issues due to non-repayment of loans and possible deposit outflow.
Banks are also requested to reschedule non- performing loans and lower capital conservation buffer requirements, a senior Central Bank official told the Business Times.
In addition, state-owned banks will invest in Treasury bonds and bills to stabilise the money market interest rate at 7 per cent, he said adding that the Central Bank will intervene as and when necessary to safeguard financial institutions. (BS)