Sri Lanka banking sector continues to expand moderately

Sri Lanka’s banking sector continues to expand at a moderate speed remaining resilient with adequate capital and liquidity buffers amidst negative growth in offbalance sheet exposures and decline in net foreign assets, a Finance Ministry report highlighted.

Despite 2021 being a challenging year for all sectors of the economy, the banking sector remained resilient owing to the various regulatory measures introduced by the Central Bank.

These measure included the introduction of priority sector lending targets, measures on discretionary payments of licensed banks, foreign exchange related regulatory measures, amending capital requirements under Basel III for licensed banks, among others.

It said Non-Performing Loans (NPLs) increased by Rs. 20.1 billion during 2021 compared to an increase of Rs. 66.4 billion during 2020.

However, due to the comparatively higher increase in loans and advances during 2021, the gross NPL ratio decreased from 4.9 per cent as at end 2020 to 4.5 per cent by end 2021. The total loan loss provisions increased by Rs. 80.2 billion, of which specific provisions accounted for 84.7 per cent.

Despite the increase in NPLs, the higher increase in provisions resulted in increases in specific and total provision coverage ratios to 64 per cent and 75.8 per cent, respectively, in 2021. As a result, the credit risk is at a manageable level as the banking sector operated with sufficient provisions and capital buffers to absorb the adverse impact arising from credit shocks.

Net interest income increased by Rs. 121.8 billion during 2021 compared to the previous year, while non-interest income increased by Rs. 24.6 billion, mainly due to higher foreign currency revaluation gains during 2021.

Non-interest expenses increased by Rs. 47.4 billion, largely due to the increase in staff cost by Rs. 20.5 billion, while loan loss provisions increased by Rs. 7.7 billion during 2021 compared to 2020.

As a result, profit before corporate tax was Rs. 258.7 billion in 2021 as per the regulatory reporting, which was Rs. 69 billion more than the previous year. Profit after tax of the banking industry was Rs. 198.4 billion by end 2021 which recorded an increase of 46 per cent compared to the previous year.

In this context, the total profitability of the state-owned banking sector increased considerably by 67 per cent to Rs. 105 billion in 2021 compared to Rs. 63 billion in 2020 mainly due to the increase in net interest income.

Despite the continuation of debt moratoria for certain sectors and gradual lapses of the concessions introduced by the Central Bank, the banking sector was able to meet the minimum prudential requirements in terms of capital and liquidity.