CB initiates individual level talks with banks as NPLs rise

With non-performing loans (NPLs) rising to 8 percent, the Central Bank (CB) has initiated individual-level discussions with banks with a view to minimise potential risks and challenges on the sector stemming from the on-going economic crisis. 

“Obliviously, NPLs will rise when the economy is contracting in the near term. However, there are certain ways and means these impacts can be absorbed to the system. So, we are holding one-to-one discussions with banks. One-by-one, we are assessing all the challenges and risks. We are confident that we can mitigate these challenges and risks,” Central Bank Governor Dr. Nandalal Weerasinghe said.
The Central Bank along with the Monetary Board members have been holding discussions with board members and senior management of domestic banks over the past couple of weeks to asses and prepare banks for potential challenges and risks at an individual level. 

President Ranil Wickremesinghe recently warned that banks could face further stress with the upcoming tax hike, which is expected to increase taxes on businesses. At the end of the first half, the top-tier banks have made substantial impairment provisions on loans and advances reflecting the deteriorating macro-economic conditions.
“We are looking at the current developments and possible future challenges that they (banks) may face as a result of the economic contraction including rising NPLs. They already have come up with certain plans to address those challenges in short and medium terms. So, we are working with them to minimise the impact,” Dr. Weerasinghe said.  

In addition to rising NPLs, some local banks also have a considerable exposure to foreign currency-denominated government securities including US$-denominated international sovereign bonds (ISBs).
Despite heightened risks, Dr. Weerasinghe highlighted that rupee liquidity in the banking sector has seen a marked improvement when compared to last year, mainly driven by the decline in currency circulation among the public. 

“There has been over Rs.700 billion liquidity deficit in the banking system at some instances last year. However, it has come down to Rs.500 billion as of now. One of the reasons for the large liquidity deficit in the past was due to the expansion of the currency in circulation, which has been decelerating at present. As a result, we see the currency outside the banking system coming back to the banking system,” he elaborated.