CB explains why no blanket debt moratorium this time

• Says banking sector stability and depositors’ interest stand key sticking points in deploying blanket concessions
• CB recently issued broad-based guidance to banks to deal with distressed borrowers on case-by-case basis
• Points out persistent delays in repayment of loans could add pressure on banks’ liquidity profiles
• Acknowledges higher interest rates make debt servicing difficult; but says no biz can operate when inflation running at 100%

Explaining the reasons why a blanket moratorium could not be deployed to assist the crisis-hit borrowers this time, the Central Bank said its responsibility is to protect the interests of both lenders and depositors and overdoing to protect one’s interests could bring in some unintended consequences to the other and would create imbalances in the banking sector and thereby the overall economy. 

Despite repeated requests to launch another cycle of broad-based payment holidays and to extend the one enjoyed by the tourism sector which lapsed last month, the Central Bank under the current leadership distanced itself from the past practice of directing banks to do either. 

Instead it decided to issue a broader guidance fortnight ago to banks to deal with each request from distressed borrowers on a case-by-case basis.

“The time has come for us to think about the depositors’ interests too,” said the Deputy Governor Yvette Fernando explaining why only one segment cannot continuously be singled out in providing assistance.  

Meanwhile, unlike during the pandemic, the current crisis, which is more pronounced in its nature and severe in its impact, has also stressed the banking sector profits, capital and liquidity, which might threaten even its stability if the situation persists longer, although there isn’t any imminent threat. 

 The persistent delays in repayment of loans add pressure on banks’ liquidity profiles, a condition which could get further compounded by compressed profitability from muted growth and rising impairments on account of both loans and other financial assets denominated in foreign currency. 

“By increasing interest rates, we are well aware that debt serviceability of SMEs will weaken. We increase rates knowing these implications,” said Central Bank Governor Dr. Nandalal Weeraisnghe.  

“But, what we prioritise is to bring price stability because neither SME nor any other business could operate in an economy where inflation surges over 100 percent,” he added, explaining why only a guidance was issued to banks to deal with distressed borrowers.

Unlike in the two years of the pandmeic where liquidity was made abundantly available, and where the Central Bank assistance backstopped potential loan defaults, the current crisis has made liquidity hard to come by as rates have soared beyond fathomable levels while the Central Bank has also withdrawn pandemic era stimulus, which sloshed markets with liquidity.