Banking sector hit hard by liquidity crunch

Banks are facing an acute liquidity crunch exacerbated by the larger macroeconomic crisis in the country.

Senior bankers say this is a primary reason why banks are not lending. "They are being risk averse," a banker said noting that banks are in a dilemma as to what is happening to the domestic debt market after the International Monetary Fund’s recommendations of restructuring domestic debt, prompting them to be cautious when lending.

A bank CEO agreed to note that consumer lending by all banks has dropped. "In a crisis situation like this, a bank has to be able to get 32 to 33 per cent interest rates on loans. But nobody will want such highinterest rates in the current context."

A senior banker in a midsized bank added that the costto- income ratio has a significant increase in banks because of the overhead and property ( such as branch upkeep) cost escalation amidst low- income generation. He said that the Central Bank Governor also mentioned the economy contracting. "In this situation how can we grow our business?"

An economist said the recent tax increases such as the income tax and the corporate tax rates will certainly fetch around Rs 80 million in the next quarter for the government in cash but most companies being such high taxes will go out of business. "Till June next year, the sector will have challenges."

Dr. Priyanga Dunusinghe, Economist, University of Colombo, said the banking sector has provided some relief such as the moratorium to businesses which they find hard to recover and pointed out that savings deposits have also dropped. "Many don't have the money to save in this crisis. The lack of foreign exchange transactions due to the forex crisis has damped that income source as migrant workers remitting money through informal channels has hit this business sector hard.”