Banking sector consolidation marked as next area of focus

Central Bank Governor Dr. Nandalal Weerasinghe said once financial sector stabilisation is achieved, the next big focus will be on consolidation.
“After strengthening the banking sector,  consolidation will be the next step. Going forward, medium to long-term programmes would be drawn up for consolidation,” he said.
The banking sector, which was adversely affected by  spillover effects of the recent economic crisis, continued to operate amidst challenging conditions. Some signs of improvement were observed in 2023.

Credit granted by the banking sector contracted during the period although some recovery was observed within the third quarter of 2023.
Credit risk of the banking sector as indicated by the Stage 3 Loans Ratio remained elevated, reflecting deteriorated debt servicing capacities of economic agents due to shrinking balance sheets amidst adverse economic conditions. However, stabilisation of credit risk was witnessed in the period as indicated by the slowdown in the increase of Stage 3 Loans.
Meanwhile, credit concentration risks persisted within the banking sector with some high credit concentration on certain sectors, namely, construction and agriculture, posing higher vulnerabilities due to economic and climate-related issues.

In addition, the high exposure of the banking sector to the sovereign posed concerns for the sector. Increased investments in Rupee-denominated government securities resulted in a significant increase in liquidity ratios of the banking sector while overall utilisation of the Standing Lending Facility by the banking sector reduced significantly.
Foreign currency operations of banks also witnessed a contraction during the period under review, particularly due to the significant decline in core FC assets despite the banking sector accumulating a substantial amount of FC resources in the form of balances with financial institutions abroad.

Meanwhile, profitability of the sector improved with reduced new impairment charges compared to the previous year though comparatively lower impairment may have negative consequences for future profitability of the sector.

Furthermore, several banks including two Domestic Systemically Important Banks (D-SIBs) reported a decline in profits during the period. Capital adequacy of the banking sector improved as a result of the decline in risk-weighted assets, primarily due to the decline in exposures to corporate and retail loans and receivables, although a significant decrease in the Capital Adequacy Ratio (CAR) was observed in D-SIBs during 3Q of 2023. (NF)