Despite the quality of the banking sector assets marginally improving in relative terms, the total volumes of nonperforming loans (NPLs) increased by as much as Rs.18 billion in 2012, according to the Central Bank Annual Report.

Accordingly, the total banking sector NPLs increased from Rs.99 billion in end2011 to Rs.117 billion by end-December 2012.

Meanwhile, the gross NPLs as a percentage of total loans (NPL ratio) declined marginally from 3.8 percent to 3.6 percent indicating a slight improvement in asset quality in relative terms, while the net NPL ratio remaining flat at 2.1 percent during the period.

The ratio however demonstrates a slight recovery in the 4Q after the sector’s asset quality deteriorated by end-September
with the NPL ratio swelling to 4.0 percent from 3.8 percent in end-2011.

According to the Financial System Stability Review for 2012 released by the Central Bank, the increase in NPLs since September 2011 was mainly due to the increase in NPLs in sectors such as tourism, trading and consumption-related pawning advances.

A few weeks ago, Mirror Business exclusively reported that the largest lender in the country, Bank of Ceylon suffered poor credit quality, predominantly due to slow repayments relating to pawning advances.

Among the others with high NPL ratio was the construction and manufacturing sector with a 7.0 percent ratio.Meanwhile, the Monetary Authority further stated that the increase of Rs.434 billion in rupee loans during 2012 was well within its expected credit growth for the year, which was capped at 18 percent.

According to the annual report, the growth of loans and advances of the banking sector declined from 32 percent or Rs.626 billion in 2011 to 21 percent or Rs.541 billion by end-2012, mitigating the potential adverse effects of continued credit expansion on banking sector stability.

In February 2012, the Central Bank tightened the monetary policy to avert a possible overheating of the economy and brought in a host of measures such as increasing the policy rates twice, followed by the imposition of a 18 percent credit ceiling (extended up to 23 percent with foreign borrowing) on rupee loans that lapsed in December 2012.