6 February 2023 03:01 am Views - 1555
The Central Bank has kicked off an asset quality review of the country’s banking sector to identify possible stresses in different pockets of banks’ balance sheets as they provided enormously on possible bad loans and other financial asset losses in 2022 with the final stretch of moratoria expiring early this year.
Despite remaining stable and resilient, Lankan banks are undergoing their most challenging operating conditions in their history with growth and profits faltering amid rising non-performing loans and capital risks.
“We are looking at each bank for the potential risk that they could face going forward in rising NPLs, interest rate impact and exchange rate impact and if they are going to have any pressure on capital and liquidity,” said the Central Bank Governor Dr. Nandalal Weerasinghe.
“Going forward that’s why one of the exercises we are doing is the ‘Asset Quality Review’, for us to understand the kind of stress the banks are going to face in the future. Based on the work we do with the banks, we can come out with recommendations on how to deal with that situation,” he said.
It is immediately not clear whether the latest study is also a part of the recently announced ‘diagnostic study’, which the Central Bank first disclosed last October to assess any capital deficiency risks in the system coming out of the asset quality stress.
The Sri Lankan banking sector is witnessing record provisions against possible bad loans and other financial asset losses stemming from their exposure to sovereign bonds, which has undermined their profitability to a greater extent.
The risk of domestic debt restructuring remains an overhang, which could add enormous pressure on the capital. Dr. Weerasinghe declined to comment on the possibility of a domestic debt restructuring claiming it’s too premature.
Meanwhile, swaths of borrowers are also falling behind their loan repayments after the interest rates rose at least three times from where they were before the economic crisis, with the Central Bank raising the key policy rates at a record pace to tamp down runaway prices.
This in turn created a liquidity crunch in the domestic interbank market until recently.
“That’s why we have introduced several schemes first to support liquidity if there is any need in the short-term,” Dr. Weerasinghe said referring to the recent measures by way of overnight injections via reverse repos and limits imposed on commercial banks in accessing standing facility windows.
Sri Lanka’s banking sector asset quality reported under the new IFRS 3 standard as Stage 3 loans ratio was at 10.9 percent by the end of September 2022, up from 8.4 percent in the first quarter. The industry expects this to peak at slightly under 15 percent this year with the expiration of debt relief schemes.