Sri Lanka banking sector under pressure

Sri Lanka’s inability to repay mounting foreign debt including a US$ 1 billion International Sovereign Bond in July and some Chinese Bank loans has become a burning issue amidst the government’s move to restructure debts in the wake of the forex crisis.

A new situation faced apart from the present woes by local banks was raised in Parliament on Thursday by opposition MP Dr. Harsha de Silva claiming that a state bank in the past conducted dollar swaps with negative premiums.

Clarifying his statement, he told the Business Times that according to forex market players a certain state bank was not able to meet dollar swaps to several banks at present.

This particular bank has entered into swaps several months ago on negative premiums he said explaining that they bought dollars at

Rs. 200 when the Central Bank held it at Rs. 200 with the agreement to sell dollars at lower than Rs. 200; 190, 185 etc.

“They didn’t have the dollars. So they wanted the swaps rolled over. But the request was refused”, he said adding that the original transaction was highly irresponsible and was never going to work.

In a statement on Thursday, the Ministry of Finance and the Central Bank assured the public and all other stake holders that the banking system is stable, and that the operations of the state Banks are being carried out smoothly, contrary to statements made otherwise.

In another development, two Chinese Banks have demanded the Treasury to repay loans installments which were due on March 21 as they are not ready to restructure debt.

These banks have given some time for the repayment following the assurance given by the Central Bank that it will make the payment soon after realising another foreign loan facility. On Monday, Chinese Ambassador to Sri Lanka Qi Zhenhong announced they were considering a $2.5 billion loan and credit line to Sri Lanka.

The country has to repay installments of $53.596 million to China Development Bank, $17 million to China Exim Bank and another sum of 386.19 million yuan by the Water Board of Sri Lanka to the Exim Bank.

Meanwhile former Prime Minister Ranil Wickremesinghe told the All- Party Conference on Wednesday that the rupee devaluation has exerted pressure on the banks.

He said private banks are currently holding vast sums of dollar loans, while state banks are carrying a large foreign debt of several state-owned enterprises.