Sri Lanka bad loans grow to 4.8-pct in June after soft-peg collapse

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ECONOMYNEXT - Bad loan in Sri Lanka banking system grew to 4.8 percent of gross loans by June 2019, up from 4.2 percent in March, though the credit system has gone through much worse levels of non-performing loans in the past Central Bank Governor Indrajit Coomarasamy said.

"Clearly it is something we have to be cautious about and monitor very carefully," Governor Coomaraswamy said.

"It is not at crisis levels, we have had higher levels in the past. What we have to do is get growth growing again. We are trying to push lending rates down and push liquidity in to the system."

Bad loans spiked after the central bank triggered a currency collapse by printing money just as growth picked up in 2019 which left the rupee at 182 to the US dollar by end 2018 from 153 at the beginning of the year.

Monetary instability kills consumption, which hits revenues of companies, whose loans then go bad.

At the beginning of 2018, bad loans were at 3.0 percent, as tighter accounting rules forced banks to disclose bad loans early.

After the 2008 soft-peg crisis and capital flight bad loans peaked at 8.8 percent. After spiking during the 2015/2016 soft-peg crisis, bad loans fell to a low of 2.5 percent by the end of 2017.

The 2018 soft-peg crisis came quickly on top of a 2015/2015 crisis, but the currency fall is deeper, and liquidity shortages were prolonged.

Amber Light

Gross non-performing loans had grown to 323 billion rupees by the end of the first quarter of 2019, from 200 billion rupees a year earlier, according to central bank data, under tighter accounting rules.

"I do not think we are at the point where red lights are flashing." Governor Coomaraswamy said.

"It is probably in the amber light stage."

Sri Lanka is also considering giving a moratorium for about 100 billion rupees of tourism loans. Banks will not have to provide for loans suspended after the moratorium was announced. However the sector is expected to recover next year.

At the moment banks are well capitalized, with ratios generally above required levels, Deputy Governor Nandalal Weerasinghe said.

"If NPLs are rising banks will have to provide. That will have an impact on capital. At the moment capital is above even after making provisions NPLs."

But loans at finance companies were at 7.8 percent by March 2019. In March 2018 bad loans were at 5.82 percent of gross loans.

However in the finance company sector, there are several legacy companies dating back to the 2008 soft-peg crisis which ended a bubble which grew for several years.

At the time the central bank was battling fiscal dominance, with the Treasury apparently vetoeing attempts to raise policy rates. (Colombo/July15/2019)