Banks struggle to secure funding lines
Sri Lankan banks are struggling to secure dollar funding lines amidst the crippling forex crunch in the country and a junk rating.
At least six banks said the funding lines by Development Financial Institutions (DFIs) have dried up or these institutions are waiting on the sidelines to make a commitment after the intended bailout from the International Monetary Fund (IMF).
When the government is downgraded to default grade, the banks in the country are also automatically put in the same grade as they cannot get a better rating than the sovereign, senior economist Dr. W. A. Wijewardena told the Business Times On Wednesday.
A senior banker at a mid- sized bank added that the biggest challenge for banks which have taken funding lines is repaying the DFIs. He said the forex shortage is adding to the problems. “Now rates are prohibitive and we can't virtually access any finding lines,” he said. He said the Central Bank ( CB) should help in this regard.
Economic Pro f. Sirimal Abeyratne pointed out lack of support by the CB with the foreign exchange reserves and sliding international confidence in the local banking system have contributed to the dire situation. “The funding lines want upfront payments because they know it is risky to work on credit,” he added that over the last few months there hasn't been any substantial improvement in the forex cash flow and macro-economic stability.
Opposition legislator Harsha de Silva told the Business Times on Thursday that urgent attention needs to be paid to the dollar liquidity area in the banking sector.
“Now the biggest issue is dollar liquidity. Despite customers holding balances in their dollar accounts, they cannot send cash out for children's overseas education for example. This is because the system does not have liquidity. But the customers are at a loss to understand this. They cannot be blamed,” a second banker pointed out.
In addition to this the rising interest rates and the mark to market rate of treasury bills and treasury bonds are forcing dollar asset revaluation of banks, a CEO of a bank said. This invariably affects the capital adequacy ratios of these entities.
Another opposition MP and former banker, Eran Wickramaratne, said the state banks must be urgently re-capitalised.
The options available are to approach portfolio managers accepting higher risks but extending loans at high interest and limited to smaller amounts,” a second CEO told the Business Times. Many banks are targeting small funding lines from certain funding agencies and hedge funds, he said, pointing out this is not enough.