Banking sector asset quality hits new low

• NPLs increase to 3.6% by end of August from 3.4% in July
• NPL volumes up 58% or Rs.94bn to Rs.225bn in first 8 months
• Situation appears to be worse than what banks portray
• CB warns banks not to play down NPLs by using different tactics  

Sri Lanka’s banking sector asset quality fell to a new low in August after the non-performing loans increased, providing clear evidence that businesses and consumers continue to struggle in servicing their loans on time.

The reported non-performing loans (NPLs)—a key measurement of banking sector asset quality— rose to 3.6 percent by the end of August from 3.4 percent in July and 2.5 percent at the end of 2017. 

During the first eight months, the total non-performing loan volumes rose by 58 percent or by Rs.94 billion to Rs.255 billion. 

In August alone the non-performing loans grew by 6.7 percent to Rs.16 billion compared to the growth of 4.7 percent or Rs.11 billion in July. 

The disturbed Central Bank as the banking sector regulator had asked the banks to be more cautious in lending before the situation goes out of control and turns into a full-blown crisis, Mirror Business learns. 

What’s more troubling could be the banks’ attempt to camouflage a certain section of these sore assets to show a cleaner balance sheet to the shareholders, regulators and other stakeholders. 

The numbers show that banks have rescheduled some Rs.155 billion worth loans during the first eight months, so that their non-performing loans look smaller and the balance sheet more appealing.

As per the data available for the last year, this is an increase of over close to 70 percent in reschedule loans. 

Hence Central Bank is said to have put the potential NPL ratio at 5.0 percent by the end of August, 140 basis points higher than the reported NPL ratio, for the same period by the banks.

The Central Bank is said to have reprimanded bank CEOs for resorting to various tactics to understate non-performing loans, Mirror Business learns.

The Central Bank is also believed to have observed the increase in impairment provisions against possible bad loans that have also not kept up to the increase in the non-performing loans.

Provisions against possible bad loans are an item in the income statement of a bank, which is often subject to manipulation based on management judgments. 
But, the new IFRS 9 on financial instruments have minimized these judgments to a greater extent. Sri Lankan banks are yet to publish a fully IFRS 9-compliant set of accounts. 

As the September earnings season is set to begin this week, banks are expected to file their third quarter results, which will show how individual lenders have fared in their handling of non-performing loans.

The Central Bank is said to have called for toughened governance in banks specifically to ensure that non-performing loans are not unduly suppressed during the quarter, Mirror Business learns.  

The Central Bank last week surprised markets by holding its benchmark rates when regional peers have tightened policy to stem the weakening rupee against the dollar and to curtail the flight of capital from government securities.