CB extends suspension on banks from buying sovereign bonds

• Suspension first imposed in Dec. now extended till April 23
• Local commercial banks and NSB have already made sizeable investments in SLISBs
• Move aimed at warding off undue pressure on the rupee
• Rupee plunged to new record low yesterday with dollar-selling rate hitting Rs.204.63

The Central Bank has extended the suspension on banks from purchasing Sri Lanka-issued international sovereign bonds (SLISBs) till April 23 in a bid to ward off the pressure on the rupee.

The rupee depreciated to a new record low yesterday against the US dollar as the dollar-selling rate was recorded at Rs.204.63 against the previous lowest of Rs.203.73 on Monday. 

On December 23, 2020, the Central Bank suspended investments by banks in ISBs for three months after observing that banks had continued to add SLISB holdings into their investments, adding undue pressure on the domestic foreign exchange market.

Sri Lankan licensed commercial banks and National Savings Bank have made sizeable investments in SLISBs during last year as they added such holdings from dollar liquidity they built from deposits as well as dollar funds they raised as loan growth lagged to keep up with the funds build-up. 

“The main contributor to the bank’s asset growth during this year (2020) was not the loans and advances,” said one local bank adding that, “debt and other instruments such as treasury bills, treasury bonds, SLDBs, SLISBs etc. became the most attractive investment opportunities to divert bank’s funds, leading to 76 percent or Rs.118.8 billion growth in debt and other instruments of the portfolio in this bank. 

First Capital Research in March 2021 report listed five private sector licensed commercial banks with the highest dollar bond holdings. Commercial Bank of Sri Lanka PLC held Rs.182 billion of bonds in rupee equivalent, Hatton National Bank PLC Rs.169 billion, Sampath Bank PLC Rs.93 billion, National Development Bank PLC Rs.20 billion and Nations Trust Bank PLC Rs.15 billion. 

“The Central Bank of Sri Lanka with a view to easing pressure on the exchange rate and considering the substantial amount of possible/potential outflow of foreign exchange by banks and its impacts on banks’ risk management, requires licensed commercial banks and National Savings Bank to suspend the purchase of Sri Lanka International Sovereign Bonds until 23 April 2021,” Central Bank Governor Prof. W.D. Lakshman said.

The suspension has been in effect since the onset of the pandemic in mid-March last year, but the banks were given the leeway to make such investments from new foreign currency inflows received by them since June. 

But the December 23 Directive made an outright suspension on such purchases considering the pressure that was building up on the rupee.