Troubled loans fall in two large State banks; but up in private banks

• BOC and People’s Bank’s combined impaired loan ratio at 9.8% by end-Sept. from 10.4% end-2019
• Impaired loan ratio at private banks increases 10.1% from 8.8% 

Impaired loans or the loans set aside for possible default fell in the two large State banks as opposed to fears that such loans could rise at exponential levels due to the pandemic triggered economic malaise. 

However, the pressure on asset quality was more evident in the privately owned banks, and a rise in impaired loan ratios in both State and private banks could become crystallized from the second or third quarter of next year as the moratorium would hide the true nature of the loans under stress at present, Fitch Ratings said. 

The Central Bank granted relief up to six months on capital and interest repayment for borrowers across a wider section since April, but the prolonged nature of the economic shock of the lockdowns and the new set of lockdowns, which went into effect since October necessitated the authorities to extend relief measures by a further six months till March 2021. 

“These measures to provide affected borrowers more time are not unexpected, and are not out of line with initiatives in other emerging markets in the region”, Fitch Ratings said. 

“Sri Lankan banks face the risk of a sharp rise in impaired loans if borrowers are unable to resume repayments once the moratorium ends, with potential deterioration highly correlated with the pace and quality of economic recovery,” the rating agency added. 

The rating agency estimates at least 26 percent of Fitch-rated banks were under the first phase of the moratorium by the end of June. Besides the government-mandated relief, the banks on their own accord have been restructuring loans before and after the pandemic. 

The two State banking giants—Bank of Ceylon and People’s Bank—managed to reduce their combined impaired loan ratio to 9.8 percent by end-September from 10.4 percent at the end-2019, mainly due to their high loan growth. 

However, the impaired loan ratio at private banks increased to 10.1 percent from 8.8 percent at the end of 2019. 
Fitch earlier projected an acceleration in private sector credit in Sri Lanka in 2021. 

A higher rate of credit growth blunts the relative assets under stress. 

Meanwhile, a higher credit growth translates into higher economic growth, meaning that the economy generates adequate income for people and businesses to service their loans.

This could naturally reduce the stressed loans and put them back into performing loans in banks’ balance sheets.