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Asset quality of Lankan banks worse than reported; but still manageable: Fitch

12 June 2017 09:59 am - 0     - {{hitsCtrl.values.hits}}

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The reported non-performing loans may not really represent the asset quality of Lankan banks, because some of the loans, if not most, might have been rescheduled for service due to tougher economic conditions, a regional specialist, who assigns final credit ratings on financial institutions, said. 
According to Ambreesh Srivastava, Senior Director and the Head of Financial Institutions for Fitch Ratings in the South and South East Asia, “so many dodgy loans,” which may have been re-scheduled, do not get captured under the reported non-performing loan (NPL) ratios. 
“We just don’t rely on the reported non-performing loan number which we believe is the bare minimum that measures the problematic assets in that institution.  But there can be so many dodgy loans and assets which are not necessarily classified as such in the non-performing loan definition. 
So, we make adjustments, sometimes we make judgment calls, in arriving at our own non-performing loan ratios, which are often somewhat higher than what is reported by the banks,” Srivastava told a banking forum in Colombo. 

The banks often can be found rescheduling facilities when the repayments become irregular and the facilities going bad, so that such a facility could be shown as a performing loan.  There could be also instances where a fresh short-term facility is granted to ensure the regular settlement of the previous loan in a bid to avoid the earlier facility from going bad. 
Hence, Fitch makes certain adjustments for these performing rescheduled loans to arrive at the most realistic NPL ratio of each banking institution. In recent times, asset quality of Lankan banks measured by the reported non-performing loan ratio, improved due to the rapid growth in loans driven by cheaper bank credit because when the loans grow faster than the bad loans, the ratio tend to decline, demonstrating better asset quality. 
This positive trend in the ratio was also stoked by the reduction in non-performing loans stemming from the gold-backed loans after 2014, where the Sri Lankan banks were hit with hefty write-offs against profits on their gold loan stock as the global gold prices took a nosedive.  But during the first quarter of 2017, banks again saw their reported NPL ratios edging higher as increase in interest rates, taxes and inflation biting into the people’s disposable incomes. The recent floods, which also disrupted the livelihoods and industries of many running small and medium-scaled businesses, could also have an adverse impact on the reported NPL.
When Fitch Ratings made adjustments for the ‘estimated performing rescheduled loans’, the Lankan banking sector’s reported non-performing loan ratio got elevated by about 1 percent, said Jeewanthi Malagala, Fitch Ratings Sri Lanka analyst, overseeing the banking sector ratings. The reported NPL ratio is around 3.0 percent for the industry. In Sri Lanka, banks rated by account for about 88 percent of the sector assets. With the potentially problematic loans also captured Sri Lanka’s reported non-performing loans reach slightly below 4.0 percent but Srivastava said the impact is still manageable in the Sri Lankan context in comparison to other regional markets such as China, India and Vietnam. 
For instance, India, which has serious asset quality issues in the banking sector, with reported NPL ratio slightly below 10 percent, the adjusted ratio for potentially problematic loans reaches as high as over 12 percent, giving headaches for policy makers as state-owned banks account for most of it.

 

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