CB issues impairment guidelines for banks

• Stipulates how banks should provide when they come out of moratoria
• Also guides banks how to provide for their exposure to ISBs and SLDBs
• Seeks to establish “consistent practices” on adoption of Accounting Standards
• CB last week announced liquidity support of up to Rs.15bn to finance interest accrued during period of moratoria

The Central Bank has issued guidelines on how the banks should approach when dealing with loan impairments, effective from next year, when they come out of the latest round of moratoria, as there could still be a section of borrowers whose cash flows would be under pressure, even after the removal of economic restrictions. 

Further, providing guidance on how to approach the impairment provisions on other financial assets denominated in foreign currency issued by the sovereigns, the licensed banks were asked to consult CA Sri Lanka and the auditors in respect of computing ‘Probability of Default’, which effectively determines their levels of loss provisions. 
Apart from the large provisions made on loans, due to the expected stress from the pandemic, the banks made heavy provisions last year for their exposure to foreign currency-denominated instruments such as International Sovereign Bonds and Sri Lanka Development Bonds, after the rating agencies downgraded the country’s sovereign ratings on concerns of debt serviceability, amid weakening debt matrices. 

The guidance issued by the Central Bank by way of a circular last week sought to establish “consistent practices” on the adoption of Sri Lanka Accounting Standards – SLFRS 9 on Financial Instruments by the licensed banks, amid COVID-19. 

Accordingly, the licensed banks were asked to establish clear guidelines on staging of loans and advances for impairment purposes, with the approval of the board of directors, considering the extraordinary circumstances created by the pandemic. 

In the cases of businesses whose activities were hampered by the direct restrictions, the Central Bank asked the banks to “exercise prudent judgment” on a case-by-case basis when classifying their credit facilities as Stage 3 or “considering the borrower’s inability to revive the business and generate sufficient cash flows to repay the exposure once the restrictions on economic activities are removed”. 

Further, the banks were also invited to exercise same judgment when classifying a facility as Stage 3 or not, “if a facility has been restructured more than twice, due to adverse economic consequences of the COVID-19 outbreak and/or the Easter Sunday attack”.

Typically facilities, which get restructured more than twice, fall into Stage 3 for impairments under SLFRS 9. 
Stage 3 loans are effectively the non-performing loans, which are typically in overdue for 90 days or more and thus resulting in substantially higher provisions

 Unveiling the six-month road map for  stability and set the stage for revival, Central Bank Governor Ajith Nivard Cabraal announced their plans to unwind the loan moratoria gradually but devise long-term plans to support the businesses affected by the pandemic. 

The road map also announced the provision of liquidity support of up to Rs.15 billion to finance the interest accrued during the period of the moratoria for financial institutions.