EPF-backed loans contribute to over 20% of SMIB’s troubled loans

• Bank also faces core capital requirement of Rs.1.6bn by Dec. 2022

State Mortgage and Investment Bank (SMIB) is at the forefront of disbursing Employees’ Provident Fund (EPF)-backed loans to salaried individuals, but the bank is now confronted with over 20 percent of bad loans as the borrowers as a habit renege on their contractual obligation to service their facilities expecting the bank to recover such loans from the EPF.

SMIB, a State-owned licensed specialised bank with assets of over Rs.51.3 billion by the end of June 2020, had a 21.73 percent gross non-performing loans ratio. “The bank’s gross NPA ratio stood at 21.73 percent as of Jun-20 as compared to 21.21 percent in Dec-19 and 21.75 percent in Dec-18. EPF loans contribute significantly for the overall high NPA’s, as most borrowers expect the bank to recover loan liabilities out of EPF balances,” ICRA Lanka said reaffirming the bank’s rating at BBB+ with a Stable outlook. 

As of June 2020, nearly 65 percent of the NPA portfolio was from EPF loans and that section of loans had an NPA ratio of whopping 73.89 percent compared to 73.56 percent in December 2019 and 70.96 percent in December 2018. 

The NPA ratio of the balance was at a much more moderate rate of 9.23 percent, though higher than most other standards. 

“The effects of the COVID-19 pandemic were the main reason for increase in NPA of the non-EPF portfolio,” the rating agency added. 

Historically, the second quarter NPA ratio of the bank has been relatively lower as claims of the previous year’s overdue on EPF-backed loans are paid during this period by the EPF Division of Central Bank. 

Apart from the sour asset quality, although underwritten by the EPF balances of the members, SMIB is also facing a capital requirement of Rs.1.6 billion in its core capital by December 2022, to meet the minimum regulatory capital level. 

ICRA Lanka expects timely and adequate capital support from the government to meet the core capital requirement, as the government owns 100 percent shares of the bank via Ministries of Finance, Housing and Agriculture. 

However the bank is one of the constituents of the Housing Development Finance Corporation and Pradeshiya Sanwardhana Bank to set up a first-of-its-kind National Development Banking Corporation in the country as part of the government’s policy.