Foreign funding continues to flow in for Sri Lankan banks despite sovereign pressure: Fitch

• But says sovereign pressure has implications on tenors and pricing of such funding 
• Forecasts private credit growth momentum to gain meaningfully from 2022

Although the weaker sovereign credit profile has presented challenges in securing foreign liquidity for Sri Lankan banks, foreign banks and funding lines have broadly defied the sovereign risks to provide them the liquidity support, an assessment by Fitch Ratings showed. 

However, the rating agency said the new conditions had implications on the tenors and pricing of such funding lines to reflect the increased sovereign risk. 

Since the immediate aftermath of the first wave of the pandemic last year, Sri Lankan banks were able to secure funding lines from multiple foreign sources, some of which happened in return for equity stakes while others happened in strengthening the liquidity profiles as banks added capital and liquid heft in anticipation of faster growth in credit after the pandemic forced interest rates into their 
historical lows. 

“Foreign banks appear to still consider funding large Sri Lankan banks, despite pressure on the sovereign, although it has affected the pricing and tenure of transactions,” Fitch Ratings said in a recent peer review of Sri Lanka’s eight largest banks, which included the two State-owned commercial lenders. 

Sri Lanka’s banking sector operates with a comfortable level of rupee liquidity and their capitalisation levels are strengthened due to both capital infusions, pandemic-driven stockpiling of cash in bank deposits and the regulatory measures by way of moratoria and restructuring of loans, which enabled them to fend off potential pressure on their liquidity. 

For instance, the rupee liquidity of the licensed commercial banking sector measured by the statutory liquid asset ratio was at 34.1 percent by the most recent fiscal quarter ended in June 2021, when the regulatory minimum was 20 percent, according to the latest Central Bank data.  Meanwhile, the same ratio at the offshore banking unit, which captures the liquidity assets in foreign currency, was at 38 percent whereas the regulatory minimum was 20 percent.  While the recent hike in the statutory reserves ratio could have some implication on the rupee liquid assets to decline, banks still operate with adequate liquidity in excess of the minimum regulatory requirement and thereby could stay hungry for growth. Fitch forecasts private credit growth momentum to gain meaningfully from 2022 in large private banks after the demand for credit subdued in 2021. 

“We expect lending, particularly through credit to the private sector, to gain momentum in 2022, alongside a modest economic expansion,” Fitch said.

Meanwhile, the ratings agency estimated the foreign currency funding share at 21.5 percent from total funding of the large banks at 1Q21 comprising of 16 percent from deposits and 5.5 percent from borrowings. Among the large banks, which secured medium to long term funding lines from development financing institutions from 2020 to date include NDB and DFCC, which are set to receive US$ 50 million and US$ 150 million each from the United States International Development Finance Corporation; Commercial Bank, which received US$ 50 million from the International Finance Corporation in 2020 and another US$ 50 million from the CDC Group in 2021; and US$ 60 million received by HNB from Proparco. These are beside the equity injections made to Commercial Bank and NDB via foreign currency capital in 2020 and 2021 respectively.