Banking sector asset quality continues to weaken

• Gross NPL ratio up to 3.3% by end of May from 3% in March 2018
• CB expects NPL ratio to climb much higher in the range of 4.5%
• Main drivers of NPLs were credit cards, overdrafts and term loans

The quality of the assets of Sri Lankan banks is continuing to deteriorate and the banking sector regulator, the Central Bank, feels the worst is yet to come.
According to the latest banking industry data seen by Mirror Business, banks’ asset quality measured by non-performing loans (NPLs), has further deteriorated, and by end of May the gross NPL ratio in the industry has risen to 3.3 percent from 3.0 percent in March 2018 and December 2017. 

But the Central Bank expects the potential NPL ratio could be much higher in the range of 4.5 percent, which includes the re-scheduled loans. 

The re-scheduled loans made a steep increase since November 2017 whereby the growth accelerated from a sheer 5.0 percent on a year-on-year basis back then to 45 percent in May 2018. 

In 2018, Sri Lanka’s banks are hit with the double-whammy of slowdown in demand for new loans and increasing defaults in the existing ones. 

As the interest rates rose in the economy and the income of the businesses and individuals came under stress due to inflation and new taxes, the demand for new loans ran dry while both segments continue to struggle to service their existing facilities.  

When borrowers struggle to service their loans, the banks re-schedule such loans, in most cases to provide the borrower some relatively easier repayment terms. 
Therefore, such a facility, which is going towards the precipice as a non-performing loan could be re-classified as a performing loan, which could tantamount to window dressing.

The banks also provide a certain amount of their profit for facilities which could go bad and the amounts are now higher after the new IFRS 9 coming into effect. 
Such provisions categorized into specific provisions and general provisions also saw a gradual increase since the beginning of this year. 

Meanwhile, some facilities, which are not serviced at all for 90 days (or 60 days in certain loans) fall into NPLs and, such loans rose by a massive Rs.65 billion, out of which Rs.25 billion came between March and May. 

Main drivers of NPLs were credit cards, overdrafts and term loans. NPLs under housing and pawning had declined. 

Credit cards’ NPL ratio had reached 4.6 percent by the end of May while the ratio under overdrafts and term loans reached 4.5 percent and 2.8 percent respectively. 
Housing loans’ NPL ratio stood around 5.5 percent, while the pawning NPL ratio remained below 2.0 percent.