Banking sector bad loans surge in Feb.

• Feb. NPL ratio hits 3% up from 2.8% in Jan and 2.5% in Dec.2017
• Feb. situation the worst since the ratio hit 3.2% in 2015
• NPLs in most key loan categories weaken in response to higher rates, tough economy    

Sri Lanka’s banking sector asset quality saw a sharp deterioration during the first two months of 2018 as individuals and businesses struggled to service their loans as the economy lost steam amid higher borrowing costs and taxes.  

According to the latest data observed by Mirror Business, banking sector gross non-performing loan (NPL) ratio—the key measure of non-performing loan portfolio against total loans—hit 3.0 percent in February, up from 2.8 percent in January 2018 and 2.5 percent in December 2017.

The asset quality weakening stemmed from almost all the key sectors and term loans, overdrafts, housing loans, pawning and credit cards saw their gross non-performing loan ratios increasing quite notably. 

February’s situation is the worst since the ratio hit 3.2 percent in 2015 when the Central Bank fired up a credit boom by printing money, which ended up busting the rupee from Rs.132 to Rs.150 against the U.S. dollar and plunging the economy in to a balance of payment crisis.  The deterioration in asset quality in the banking sector appears very serious at present as the sour loan portfolio surged by Rs.19 billion during February, more than the total sour loans recorded for the full year of 2017.

During 2017, the non-performing loan portfolio in the banking sector rose by Rs.18 billion. 

While the larger lenders lead the pack in terms of the absolute growth in their NPLs, small banks actually recorded the highest gross NPL ratio which is almost twice the sector average of 5.6 percent. 

Sri Lankan consumers and businesses borrowed heavily during the three years from 2014 to 2016 when bank credit was kept artificially cheap. But as of last year, their debt servicing capacity waned gradually in response to higher borrowing costs, indirect taxes, inflation and marked slowdown in the businesses and the entire economy.

Last year’s corporate profits reflected this phenomenon as their earnings were hurt from the higher finance costs as some were busy restructuring their balance sheets.  

Sri Lanka’s economy was estimated to have grown by 3.1 percent 2017, the lowest in 16 years. 

Last week, the Central Bank surprised the market with a 25 basis points cut in the Standing Lending Facility Rate, which could ease the credit flow into the hands of individuals and businesses. 

The Monetary Board of the Central Bank said the moderating inflation and restrained private sector credit growth gave them some headroom to ease the monetary policy stance. 

During the first two months, banks gave Rs.100 billion in new loans to the private sector for consumption and investment.