Sri Lankan banking sector feels the distress amidst rising NPLs

Sri Lanka has undergone a financial beating, leaving the country’s banking sector in an insecure position although some of the leading commercial banks have found a balance between risk and growth, official sources disclosed.

The banking sector’s gross non-performing loans ( NPLs) ratio is set to reach 5 per cent at the end of this year, the highest rank since 2014 amid increased market lending rates and a sluggish economy, sources said.

Although the sector has a healthy growth outlook, the Central Bank is keen to keep a lid on credit expansion, while higher regulatory standards may trigger long- awaited consolidation, a senior Finance Ministry official said.

By the end of 2018, the banking sector consisted of 26 Licensed Commercial Banks ( LCBs) and 7 Licensed Specialised Banks (LSBs). There were 13 foreign banks within the total number of LCBs. The banking sector continued to contribute to economic activity and development throughout the year by enhancing banking services and expanding its networks and accessibility throughout the country.

Accordingly, 34 new branches were opened and 801 new ATMs were installed during the year 2018.

According to the latest government audit report, the overall Non - Performing Loans ( NPL) ratio of the banking sector increased to 3.4 per cent at end of 2018 from 2.5 per cent at end 2017.

NPLs of the two main state banks, Bank of Ceylon and People’s Bank were Rs. 53.75 billion and Rs. 31.47 billion respectively by the end of 2018 and accordingly NPL ratio reported as 1 per cent and 2.48 per cent respectively showing lower ratios than the banking sector at the end of 2018.

The banking sector’s NPLs continued to rise rapidly, up 39 per cent in first half of 2019 (64 per cent in 2018) and 46 per cent for the first eight months of 2019.

The banking sector asset base surpassed Rs. 11 trillion by end of 2018; with year-on-year growth reaching 14.6 per cent by end 2018 from 13.8 per cent by end 2017, Finance Ministry data showed.

The asset portfolio mainly consisted of loans and advances, which accounted for 65.2 per cent of the banking assets.

Assets of the two main state banks, Bank of Ceylon and People’s Bank were Rs. 2,268 billion and Rs. 1,735 billion respectively which accounted for 33.9 per cent from the total assets of the banking sector.

Customer deposits continued to be the major source of liabilities which accounted for 72 per cent of the total liabilities and capital of the banking sector.

Deposits of the two main state banks, Bank of Ceylon and People’s Bank were Rs. 1,765 billion and Rs. 1,423 billion respectively as at the end of the year 2018 which accounted for 37.5 per cent from the total deposits of the banking sector.

Total borrowings of the banking sector increased significantly by Rs.156.3 billion (9.7 per cent) in 2018 compared to a decline of Rs.89.3 billion (negative growth of 5.3 per cent) in 2017.

This increase in 2018 was mainly due to the increase of rupee borrowing which grew by 23.7 per cent ( Rs. 142.3 billion) in 2018.

Borrowing of the main two state banks were Rs. 237 billion, official sources revealed.

However the Fitch rating agency expressed the belief that loan growth could remain subdued, particularly until the ending of election cycle in 2020.

The loan/deposit ratio for the sector decreased to 87 per cent by end of the first half of 2019 from 91 per cent at end-2018, indicating that funding and liquidity pressure has eased, the rating agency said.