Banks seen turning conservative in face of loan moratorium

Sri Lanka’s banks could turn conservative to defend against potential effects from the loan moratorium and the broader credit support scheme implemented for the small and medium-sized enterprise (SME) segment, but the wider industry remains confident of a turnaround in growth and earnings in 2020. 

Speaking on the sector outlook for 2020 and beyond, Dimantha Mathews, a senior researcher attached to First Capital Holdings PLC said, the banks had indicated that they could turn out to be more risk averse and extend loans backed only by collateral. 

“We have had a number of interviews with the banks over the last couple of weeks. With this (loan) moratorium, what these banks have actually started is to look at more or less collateralized loans going forward. 

What happens is banks have become risk averse with this situation,” Mathews said.

When the SME loan moratorium was first announced last December, it was met with some resistance from the banks. 

However, a consensus was reached after several rounds of talks with the Central Bank and Treasury official as to how to go about the credit support scheme for struggling SMEs. 
Last week, the Central Bank amended a circular to extend the period to apply for the moratorium up to February 10, from the original January 31. 

However, the Central Bank is of the opinion that the impact from the loan moratorium on banks is limited because SME loans are only 12 percent of total loans outstanding of the banking sector and the past evidence suggests that only a third of SMEs actually apply when such a blanket concession is made available. 

“Total advances by the banking sector would be Rs.8 trillion and the maximum possible SME exposure would be 10-12 percent of that. According to our past experience, all those exposures were not materialized with only one third of requests coming in out of the full exposure,” Central Bank Deputy Governor H.A. Karunaratne said.

The Central Bank is expecting banking sector loans to the private sector to accelerate from 4.4 percent in 2019 to 13 percent in 2020, a target broadly in line with market expectations.  
First Capital Holdings and few other research houses also expect banking sector private credit to expand by at least 15 percent or around Rs.800 billion this year.