Banking sector asset quality improves in October

• Sector gross NPL ratio improves to 5.2% from 5.4% in Aug.
• Sector gross NPL ratio at end-2019 was 4.7%

The asset quality of Sri Lanka’s banking sector has improved in October contrary to forecasts of a major deterioration floated by rating agencies, sector analysts 
and economists.  

According to the latest data available up to the end of October, Sri Lanka’s banking sector asset quality as measured by the gross non-performing loan ratio, has declined to 5.2 percent from 5.4 percent in August.  

The gross NPL ratio at the end of 2019 was at 4.7 percent. 

The improvement in asset quality in October is an achievement given the trying conditions that the banking and the broader financial services sector is facing due to virus related disruptions. 

The improving asset quality also demonstrates the robust nature of the growing demand for loans in the system. 

The data showed that private sector credit has continued to grow in October, though losing some momentum due to lockdowns in widely populated regions in the country.

The interim financial reports of banks for the third quarter also showed an increase in loans and improvement in asset quality during the period. 

However, the rating agency ICRA Lanka, a few weeks ago said the reported NPLs could be hiding the true nature of the asset quality given the moratoriums. 
Since last year, the rating agencies and other so-called analysts and experts have made a sputtering noise against soaring non-performing loans as a sure thing. But the latest results have debunked those claims. 

Most of their predictions on - from corporate performance to banks to broader economy - have gone awry, putting their credibility at risk. 

When the Moody’s Investors Service downgraded Sri Lankan sovereign on September 27 just three days prior to the settlement of its billion dollar sovereign bond, Sri Lankans began to doubt their credibility and their true intentions, while the Fitch’s downgrade last Friday in more of a herd action than backed by rationale, have rendered the actions of the global rating agencies irrelevant in the wider scheme of things in the economy. 

The Finance Ministry rubbished the rating action in a strongly worded response saying the action was, “based on uncorroborated facts”, “puzzling” and “demonstrates prejudicial approach”. 

“Practices of this nature by an international rating agency without a constructive engagement with the government on the promising alternative, policy approaches are likely to make the agency concerned completely irrelevant as the country rises strongly in the period ahead”, the statement issued few hours after Fitch cut their rating said.