Central Bank to review single borrower limits to cut banks’ exposure to sovereign

• “The current regulation on single borrower exposure limits will also be reviewed to reduce sovereign-bank nexus”- CB
• Dollar loans some banks gave to SOEs still in default
• Rupee collapse in March compounded losses of SOEs
• CB to also assess capital and liquidity levels of the banking sector 

The Central Bank this week said it would review the single borrower limits in a bid to cut the excessive exposure of some banks, and in particular the exposure of State-owned banks have to the sovereign, which is represented by State and the State-owned 
enterprises (SOEs). 

At the forefront is Ceylon Petroleum Corporation (CPC), which has over the years borrowed excessively from the two State banks – People’s Bank and Bank of Ceylon – to cover its massive losses and also to pay for imported oil. 

While the rupee borrowings have accumulated over the years due continuous losses of these SOEs, they also borrowed in dollars when the country was facing foreign currency shortages.

According to banking sector sources, the dollar loans some banks gave to these institutions are still in default as the country hasn’t recovered from its foreign currency shortage. 

Meanwhile, the collapse of the rupee against the dollar compounded the losses of these institutions as they had to convert such loans at a sharply devalued rupee. 

However, the government has since raised the fuel and electricity prices to reflect the cost to curtail losses, but has done nothing so far to clamp down on corruption, inefficiencies, wastage and the significant issue of overstaffing, which have gripped these institutions.

As a result, the government continues to make attempts to pass the burden of losses at SOEs to the general public via increased prices. The proposal to raise electricity tariffs by another 65 percent from January is a case in point.

“…the current regulation on single borrower exposure limits will also be reviewed to reduce the sovereign-bank nexus,” the Central Bank said announcing its policies for 2023.

Meanwhile, the Central Bank also intends to review the existing policies on the capital and liquidity of banks to ensure that they remain sufficient to withstand current and future shocks. 

During the last decade or so, the Central Bank has raised the minimum capital requirements of banks and ensured migration of the country’s banking sector towards enhanced capital ratios under BASEL III rules which encompass additional capital buffers to withstand unexpected shocks.

These additional capital buffers built by banks made them stronger and they became useful in confronting both the pandemic era stresses as well as the shock that ripped through the sector last year triggered by the sovereign default and the record high asset quality risks that emerged when elevated rates pushed scores of borrowers into default. 

However, the prospect of a domestic debt restructuring could send ripples and the sector might require substantial recapitalisation in such an eventuality, according to the people in the sector. 

“Existing regulations relating to capital and liquidity will be reviewed in order to preserve capital and liquidity levels of the banking sector to withstand emerging risks”, the Central Bank added.