Improved business climate likely to keep impairments and bad loans subdued for banks

• 50% drop in moratorium applications during final moratorium extension in Oct.-Nov. 2020 shows economic recovery
• Improved business climate may lower impairment provisioning, reducing NPLs to 5.3% by 2023

A working economy and a healthy growth in loans would keep the credit costs and non-performing loans (NPLs) under check, as the banking sector in Sri Lanka has largely shown its resilience before the adversities thrown in by the pandemic last year.

The banks and broader businesses are already looking past the pandemic and are striving to make up for the lost output by accelerating their activities while adhering to the health guidelines when it comes to in-person dealings, upping the prospects for 2021. 

First Capital Research (FCR), in its latest research report on the banking sector outlook for 2021, gave a broadly sanguine outlook on the Sri Lankan banking sector, on the premise of the faster recovery of economic activities, improved business climate and thereby the lower credit costs for banks. 

“Economic activity bounce-back with normalising SME business cycle illustrated by the 50 percent drop in moratorium applications during the final moratorium extension in Oct.-Nov. 2020,” FCR said. 

“Improved business climate may lower impairment provisioning, reducing NPLs to 5.3 percent by 2023,” it added. 
When the pandemic struck the country in March, the global rating agencies predicted calamity for banks and the broader economy, with very high NPL forecasts but the timely and measured intervention by the Central Bank through repayment holidays and liquidity support to businesses by way of concessionary rate working capital loans largely softened the impact. 

“The CBSL’s reduction of interest rates, enhancing market liquidity and financing the government were aimed at supporting economic activity. The CBSL continuously injected liquidity, supporting the financial system throughout and announces multiple moratoriums to provide breathing space for businesses.

Back-to-back moratoriums limit NPL shocks to record below expectations but banks take the safe zone with massive provisioning,” FCR noted.

The research house forecasted 12 percent growth in private sector credit this year, compared to the 14 percent growth expected by the Central Bank and upgraded its GDP growth forecast to 3.2 percent, from 2.8 percent.