Banks, finance companies improve asset quality defying forecasts and expectations

Defying many forecasts and expectations, banks and finance companies have managed to do better on their asset quality parameters in 2021 even amid the worst economic conditions that prevailed due to the COVID resurgence and foreign currency troubles.

According to the latest data as at December 31, 2021, licensed banks recorded their gross non-performing loans (NPL) ratio at 4.5 percent with the bigger licensed commercial banks recording an even lower 4.3 percent ratio, in comparison to 4.8 percent and 4.5 percent respectively three 
months ago. 

At the beginning of the year, all Sri Lankan banks and licensed commercial banks had gross NPL ratios of 4.6 percent and 4.5 percent respectively. 

Meanwhile, licensed specialised banks, which typically stand behind licensed commercial banks in almost all the performance indicators recorded an asset quality ratio of 6.5 percent by the end of December 2021, compared to 7.8 percent in September 2021. 

The sector started the year with a gross NPL ratio of 6.6 percent but peaked in the June quarter when the ratio hit 9.0 percent as the lockdowns in May hit businesses and livelihoods harshly. 

Despite the improvement seen in asset quality indicators of the banking sector in 2021, sector analysts are expressing concerns of its future trajectory specially when interest rates are primed to rise several more percentage points in the remainder of the year and the borrowers coming off from years long payment holidays.

There is a direct correlation between interest rates and NPLs and the two are positively related as when one goes up the other also follows. 
The slowdown in banking sector NPLs in 2021 is also attributable to the sharp increase in their loan books as the higher increase in the denominator blunted the true impact into 
the ratio. 

Licensed commercial banks unleashed a record Rs.811 billion in private sector credit in 2021, recording the highest ever credit disbursed in a single year as they took advantage of the ultra-low interest rates that prevailed since the third quarter of 2020. 

Meanwhile, the non-bank finance company sector also improved its asset quality reporting an NPL ratio of 11.0 percent, down from 12.83 percent in September 2021, and from 13.86 percent at the start of the year. 

The licensed finance companies did even better with a gross NPL ratio of 10.81 percent compared to 12.66 percent in September 2021 and 13.87 percent in January 2021. 
However, the ratio stood at 18.52 percent for the specialised leasing company sector, which was down from 19.30 percent in September 2021, but up substantially from 13.58 percent at the beginning of the year.