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ECONOMYNEXT – Bad loans in Sri Lanka’s banks grew to 4.9 percent of assets in the September quarter from 4.8 percent in June, while those in non-bank finance companies grew to 9.69 percent from the 9.09 percent in the aftermath of a 2018 collapse of the currency.
The rate of bad loan accumulation seems to have slowed in the banks 0.1 percent in the quarter.
So far the level of bad loans is much lower than had come from previous collapses of Sri Lanka’ soft-pegs.
After the 2008/2009 crisis, which came after a relatively long period of stability followed by a severe collapse of the US economy, bad loans spiked to 8.8 percent before beginning to fall, a new credit cycle and recovery began.
In the 2011/2012 balance of payments crisis bad loans spiked to 6.2 percent for banks.
For non-banks it was 7.56 percent.
The 2018 crisis of the flexible exchange rate however came as rates were cut and liquidity was injected from April, with only a few months of recovery from the previous liquidity injection crisis in 2015/2016.
There was barely one year of monetary stability in 2017, before instability began, that the bad loans from the two crises look as if they came from one currency crisis.
All collapses of soft-pegs or ‘flexible exchange rates’ are followed by spikes of bad loans. In currency crises in East Asia, bad loans had gone up as much 20 percent and some banks collapsed.
A prolonged period of low interest rates may help build a bigger bubble, whose collapse would be greater.
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In the recovery phase, bad loans fall due to repayments as well as relative falls, as credit volumes recover.
A prolonged period of monetary instability and bad loans may trigger high nominal interest rates. Analysts have called for monetary stability to be restored by reforms. (Colombo/Dec30/2019)
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