Tourism sector slowdown likely to worsen banking sector asset quality

By Nishel Fernando
Sri Lanka’s tourism industry, which is experiencing the adverse impacts of the multiple suicide bombs that targeted the churches and five-star hotels on Easter Sunday, may further worsen the country’s banking sector asset quality with an anticipated rise in non-performing loans (NPLs).

Speaking to Mirror Business yesterday, Commercial Bank Deputy Chairman and Sri Lanka Institute of Directors Chairman Preethi Jayawardena cautioned that a sustained slowdown of Sri Lanka’s tourism sector would not only impact the country’s balance of payments in terms of bringing less foreign exchanges to the country but also it would risk creating an adverse impact on the employment and incomes of the people who are engaged in the sector.

He opined that it would create ripple effects across different sectors of the economy, including the banking sector.

According to the World Travel and Tourism Council, the total contribution of tourism to the employment of the country is estimated to be 12.1 percent in 2018. It was projected to increase up to 12.4 percent this year.  

Jayawardena pointed out that the service charges are a crucial part of most employees in the hotel industry, as they receive relatively low fixed salaries, while a large number of people, who are catering to the demands of tourists, also rely on the industry to support 
their families.

“When all of these people’s income level drops, just imagine the situation. That’s a bigger problem that we are not seeing at the moment,” he said.
Jayawardena expects the NPLs to rise in the personal loan segment as the repayment capacity of the people who have obtained loans in the hospitality industry will be hindered significantly, given the expected slowdown in the industry.

He also warned that the large hotel chains particularly would suffer from the current situation, as their revenue come down while their operational costs remain intact, which could also potentially drive the NPLs upwards.

Even prior to Easter Sunday, he noted that the hotel and construction industries’ NPLs were on the rise while the personal loan segment was in a worse footing.

“We have been taking so many different drastic measures but still the success rate has been very poor because people were genuinely unable to pay their dues,” Jayawardena said.
He revealed that some firms, which owed Rs.700-800 million, were even unable to repay Rs.10-20 million to avoid being transferred to the rescheduled loans category.

The banking sector NPLs rose to the highest levels last year, since 2015. In the third quarter of last year, the industry NPL ratio climbed up to 3.6 before coming down to 3.4 percent in the fourth quarter. In addition, the rescheduled loans were also on the rise during last year.

Meanwhile, Jayawardena emphasised that the government and tourism industry stakeholders need to prioritise ensuring security in the country first.

“I hope the government will take the necessary steps to revitalise this sector and to bring back to normalcy. It will depend on how fast our authorities can put things right,” 
he said.