Banking sector NPLs decline slightly in June; but picks up in July again

• June NPL ratio declines to 5.4% from 5.6% in May
• But July NPLs recorded at 5.5% signaling uptrend 

Banking sector non-performing loans (NPLs) received some respite in June as the ratio fell to 5.4 percent after reaching a six-year high of 5.6 percent in May, but the provisional data for July pointed to a slight uptick again. 

The ratio for July was 5.5 percent, Central Bank officials said last week. This is in comparison to 5.1 percent in March and 4.7 percent in December 2019. 

Sri Lanka’s non-performing loans have been on the rise from end-2017 when such loans accounted for only 2.5 percent of total gross loans of the banking sector. 

But bad loans steadily rose since then with the Monetary Board changing course to raise interest rates to cool down the economy, which resulted in defaulted loans and slowdown in growth in new loans.

In was not immediately clear what caused the June decline in the overall non-performing loans ratio as most banks reported higher NPL ratios for the June quarter. The significant slowdown in new loans or in some instances  contraction in the loan books in the 2Q20 should have in fact sent the ratio higher as the default loan stock grow in size in the midst of an economic slowdown.

The respite could be temporary as analyst and rating fraternities are of the belief that the actual non-performing loans are not reflected in the reported NPLs of banks amid loan restructuring and moratorium hiding a large portion of bad loans, which otherwise could have fallen into the 
non-performing category.

The reporting guidelines have also been eased to some extent, which may not capture the severity of the situation.

However, if the economy gathers steam, the businesses will be in a better shape to resume servicing their loans once the relief measures expire, by which time the private sector would have also gained momentum. 

In the meantime, the woes at the non-bank financial sector appear more challenging than what their banking counterparts are facing. 

The sector reported 11.37 percent of their loans as bad by March and that could reach 16-18 percent by June end, ICRA Lanka, a rating agency, estimated in a recent report.