Banking sector asset quality wanes in 2017

• Higher interest rates, slowing economy hit borrowers’ repayment capacity 
• State lenders are biggest contributors with 80% of new additions
• Banking sector NPLs surge by Rs.42bn in first 11 months of 2017
• By end-November 2017 banking sector total NPL portfolio at Rs.184bn

The non-performing loans (NPLs) saw a steeper increase in 2017 as over two years of aggressive growth in consumer lending by Lankan banks started hurting their asset quality. 

The latest data showed the banking sector NPLs shooting up by as much as Rs.42 billion during the first 11  months of 2017, an increase of 30 percent from the full-year figure of 2016. 

Interestingly, 80 percent of the new additions to NPLs were from the state banks.  

By end-November 2017, the total NPL portfolio of the banking sector stood at Rs.184 billion. 

Sri Lanka’s banks were on a lending binge during 2015 and 2016 when the rates were kept artificially lower to show instant growth in the economy. 

Most of these loans went for consumption-related areas such as housing, leasing, credit cards and consumer loans and it took close to 18 months for the credit to slow down.

Mirror Business last week reported on the slowdown in private sector credit to around 15.4 percent from over 22 percent seen in 2016. 

Yet, the banks have extended as much as Rs.558 billion in credit to the individuals and corporates during the first 11 months of 2017, a slowdown from Rs.758 billion in private sector credit extended in 2016.

At the dawn of 2016 and 2017, many economists and banking sector analysts forewarned of the price the banks would have to pay from their asset quality as a result of this exponential growth in credit, specially to consumption-related areas. 

In November alone, the reported NPLs in the sector was Rs.7.0 billion, which reported an increase of 21.4 percent over the same month a year ago. 
March and June are the only two months when NPLs took a negative turn in 2017. 

The year marked the highest in reported NPLs in the banking sector since 2013, when the sector NPLs were hit by the pawning debacle took place in that year.

The adverse weather persisted throughout most period of 2017 may also have contributed to the higher NPLs.  

However, this is only the reported NPLs and the actual figure could be somewhat higher, independent analysts claim. 

The banks often can be found rescheduling facilities when the repayments become irregular and the facilities going bad so that such a facility could be shown as a performing loan before going bad. 

There could also be instances where a fresh short-term facility is granted to ensure the regular settlement of the previous loan in a bid to avoid the earlier facility from going bad. 

According to Fitch Ratings South and Southeast Asia Senior Director and Financial Institutions Head Ambreesh Srivastava, who was in the country a few moons ago, so many “dodgy loans”, which may have been rescheduled, do not get captured under the reported non-performing loan ratios. 

“We just don’t rely on the reported non-performing loan number, which we believe is the bare minimum that measures the problematic assets in that institution. 
But there can be so many dodgy loans and assets, which are not necessarily classified as such in the non-performing loan definition. 

So, we make adjustments, sometimes we make judgment calls, in arriving at Fitch’s own non-performing loan ratio, which is often higher than what is reported by the banks, said Srivastava. 

When Fitch Ratings made adjustments for the ‘estimated performing rescheduled loans’, the sector reported non-performing loan ratio went up by about one percent. 
The reported NPL ratio in Sri Lanka stood not so high, at 2.9 percent in November, up from 2.8 percent in October. The ratio was 2.6 percent in 2016.  However, the NPL ratio varies significantly based on the size of the bank. 

According to the reported NPL ratios, the small banks reported the highest NPL ratio of 5.1 percent, while the lowest of 2.6 percent is reported by large banks. 
The mid-sized banks reported an NPL ratio of 2.8 percent. 

Sri Lanka’s banks in recent times have stepped up their efforts in recovery of NPLs. 

They also have taken additional measures to identify the facilities with irregular servicing patterns and ensure they do not fall under NPLs.