Banking sector non-performing loan ratio edges up in first quarter to 5.1%

Sri Lanka’s banking sector asset quality measured by the gross non-performing loan (NPL) ratio edged up to 5.1 percent during the first three months of 2020, from 4.7 percent at end-2019, broadly in line with the expectations, the latest Central Bank data showed. 

The March level could have been the peak in the NPLs in the sector, if not for the economic disruption caused by the pandemic from mid-March, as the sector had experienced a strong growth in new loans, amid renewed optimism after the presidential election.  

The March reading of the NPL ratio is the last before the full impact of the pandemic is felt by the sector but the moratoriums on large swaths of loans and eased rules on reporting of NPLs could put a temporary lid on the ratio, which otherwise could go through the roof, as many businesses and individuals had their incomes impaired and were unable to service their loans.
The rating agencies cautioned that although the reported NPLs could be lower, due to restructuring of loans and moratoriums, those would only provide the sector a temporary respite but the actual NPLs hidden inside that could be much higher. 

The direction of the asset quality will depend largely on the pace at which the economic activities return to normalcy, the level of private sector credit growth and business and consumer-friendly policies and how quickly confidence level improves. 

The Central Bank recently slashed its private sector credit growth target to 4.0 percent for 2020, about a third of what it envisaged at the beginning of the year and provided liquidity to the banking sector to support borrowers hurt by the pandemic-induced economic damage.

The interest rates have now been brought down to levels not seen in many years and that could stoke fresh demand for loans.  

Sri Lanka’s banking sector NPL ratio, which was at 2.5 percent at end-2017, started its upward trend from the beginning of 2018, due to the slowdown in growth for new loans and rise in default loans, caused by a mix of toxic policies unfriendly of business and consumption. 

Meanwhile, although the overall banking sector NPL ratio has surpassed 5 percent, the ratio at the licensed commercial banks stood at 4.9 percent. 

However, the licensed specialised banks reported a 6.6 percent NPL ratio, sharply up from 5.5 percent at end-2019.