Banking sector December NPLs fall to lowest level seen during 2020

By Nishel Fernando
Sri Lanka’s banking sector asset quality, measured by the gross non-performing loan (NPL) ratio, fell to the lowest level seen during 2020, finishing the year with 4.9 percent, according to the Central Bank (CB) officials. 

The NPLs for the sector peaked at 5.4 percent in the second quarter of last year, due to the adverse impacts of COVID-19 on the economy, before slowing it down to 5.3 percent at the end of the third quarter.

The back-to-back moratoria granted by the CB have enabled the banking sector to maintain NPLs below expectations, while providing breathing space to pandemic-hit businesses. 

However, commenting on the lower NPL ratios at end-2020, Central Bank Deputy Governor T.M.J.Y.P. Fernando noted that there’s a tendency for NPLs to further come down at the end of the accounting year. 

On March 31 this year, the extended debt moratorium granted to COVID-19-affected businesses and individuals as well as tourism-related business is scheduled to expire.  Fernando said that it is too early to comment on the impact of the moratorium until these measures expire at end-March, which would largely depend on the normalisation of business activities of these entities.

“We will have to see how borrowers start repaying,” she said.

According to the Central Bank’s latest Business Outlook Survey, the business conditions are expected to improve in the current quarter (1Q), with society adapting to the new normalcy and the expectations of expedited vaccination programme.  In particular, the survey respondents expect the demand and sales for the agriculture and industry sectors to improve during the year, while services sector is expected to remain subdued.

The Central Bank also expects a partial recovery of the tourism sector with the reopening of the country’s boarders for international travellers last month.

Reflecting improving business environment, there was a 50 percent drop in moratorium applications during the final moratorium extension in October-November last year. With the expiration of moratoriums, First Capital Research (FCR) expects NPLs to rise again this year and to come down to 5.3 percent by 2023.  Meanwhile, commenting on the implementation of the budget proposal to consolidate the finance companies functioning under commercial banks, Fernando said that the CB plans to hold further discussions with the Treasury on the implementation of the proposal.

The proposal was aimed at strengthening the banking sector.

However, Fitch Ratings expects banks to be reluctant to absorb their finance and leasing firms, due to the significant difference between their risk profiles and underwriting practices, which could lead to elevated challenges in achieving effective management.