The non-performing loan (NPL) ratio of the licensed finance company sector has edged up to 9.8 percent in October while the ratio for the licensed commercial banks stood steady at 4.9 percent amid the pick up in private credit.
The two ratios for September were 9.69 percent and 4.9 percent, respectively but have significantly deteriorated from 7.66 percent and 3.4 percent at the beginning of the year.
The latest numbers were disclosed by Central Bank Senior Deputy Governor Dr. Nandalal Weerasinghe, during the post-monetary policy press briefing held last Friday.
The Monetary Board decided to leave policy rates unchanged on Friday citing the appropriateness of the current monetary policy stance, which provides “ample room” for market rates to ease further. The cracks in the banking and non-banking sector asset quality began to appear in 2018, after a two-year credit spurt that ended abruptly in 2016.
The Monetary Board reversed its unsustainable monetary accommodation in 2016 while the government slapped people with a slew of taxes under its economic stabilisation programme with the International Monetary Fund (IMF). By end-2016, the gross non-performing loans ratio of the non-banking sector was 5.26 percent while the banking sector had a bad loan ration of only 2.6 percent.
The higher interest rates elevated the loan servicing cost beyond the reach of most of the borrowers while the taxes erased the disposable incomes of the people.
As a result, the banks were compelled to keep aside thumping provisions for possible bad loans in the quarters and years that followed, taking a sizeable hit on their earnings.
In January 2017, Fitch lowered its outlook on Sri Lanka’s banking sector to ‘Negative’ from ‘Stable’ citing heightened challenges in the operating conditions with the potential for rising bad loans and mounting pressure on capital earnings. The new Gotabaya Rajapaksa administration elected in mid-November has introduced several measures to unshackle the economy by way of tax cuts and debt moratoriums for businesses,
hoping to revitalise economic activity.
The new administration appears to believe that such a stimulus package will trigger demand for loans, which have been weak during the last couple of years and leave people with more money to service their debts.
According to the latest Central Bank data, the private sector credit growth for November picked up pace with Rs.47.1 billion in fresh disbursements or 4.4 percent growth year-on-year. The Central Bank expects credit growth to pick up 21 to 13 percent next year.