Assures financial sector stability despite potential domestic debt restructuring

At a time when fears are persisting about the negative impacts a potential domestic debt restructuring would have on the country’s banking sector, Central Bank Governor Dr. Nandalal Weerasinghe yesterday expressed confidence in maintaining the financial sector stability and stability of the banking sector, going forward. 

“We are confident that we can manage the financial sector stability. Going forward, in a contracting economy, we would see some provisioning required by the commercial banks to address the rising NPL situation. 

But I’m confident that most of the commercial banks will be able to manage the situation,” he said.
Weerasinghe also said the Central Bank is now ready to support the banks by providing them with short-term liquidity.

“In terms of liquidity stresses, the Central Bank is willing to support to provide short-term liquidity to banks. Some erosion of capital we would see with the rising of the NPLs. I’m sure the banks can manage. We have been having discussions with each one them on their stress levels, outlooks, etc.,” he said. 

During a recent meeting with the banking sector heads, the Central Bank had expressed its desire for lower market interest rates, particularly with inflation making a turnaround and inflation expectations anchoring. 
However, the uncertainty surrounding the potential domestic debt restructuring is keeping the market rates higher. Weerasinghe last week said the fears of possible domestic restructuring have already priced into the government securities yields, which act as the base for market interest rates. 

“Even with some kind of treatment, we are confident that we can manage the financial sector stability,” Weerasinghe yesterday assured. 

He said ensuring the stability of the banking sector is also in the interest of the country’s external creditors.  “They (external creditors) want to maintain the stability of the banking sector. They will not be asking for a solution, which will have an adverse effect on the domestic banking sector.

There is a rationale for that. For them to recover the value of their investment, a stable banking sector is needed. If that solution or treatment is going to have a significant impact on the banking sector, that will not help anyone,” he opined.