Banking sector asset quality holds up as lending accelerates, economy heals

• NPL ratio by end-August at 5.4%, unchanged from end-June
• Rating agencies say actual figure higher than what’s reported

The banking sector asset quality held up during most of the third quarter, albeit weakening somewhat from the levels seen at the beginning of the year. 

According to the latest data available up to end-August, Sri Lanka’s banking sector asset quality, as measured by the gross non-performing loan (NPL) ratio, has held up at 5.4 percent, the same level seen at the second quarter ended in June. The gross NPL ratio— loans in default more than 90 days— was at 4.7 percent of total loans in the system in December 2019 and 5.1 percent in March 2020. 

In absolute terms, the NPL portfolio of the banking sector has risen by Rs.99.6 billion from January through August to Rs.481.3 billion, a 26.1 percent increase from the same period in 2019. 

The Central Bank said the situation is manageable, albeit weakening from the start of the year. 
“The asset quality of the sector showed a deterioration but remained manageable,” 

it said. A more granular analysis of the data across different sectors showed the weakness was common across all sectors, except agriculture, in the first half of the year. 

Agriculture demonstrated resilience amid adversity and it ploughed ahead amid all odds, with government patronage, guaranteed prices, market linkages and special concessional loan schemes tailored to the sector. 
However, economic analysts and rating agencies cautioned over the reported NPLs, which hide the true picture, given the moratoriums extended to large swaths of pandemic-affected borrowers and the flexibility afforded in recognising Stage 3 loans—another term for NPLs in 
accounting jargon. 

“However, this figure is somewhat distorted as the loans that qualify for moratorium are being counted out of the NPL category. Hence, the true extent of the NPLs may be higher than the said figure,” credit rating agency ICRA Lanka said in its latest economic update.  

However, one other reason for NPLs to stay at the same levels, through most of the third quarter, could be the faster than expected expansion in credit, as seen from the latest private sector credit data. 

Sri Lanka expanded its total outstanding private sector credit by Rs.88 billion in September, up from Rs.78 billion in August. With the September data, the total outstanding private sector credit has expanded by about Rs.200 billion during the first nine months of the year.