Loan woes continue for many despite economic recovery

• Top banker says a large pool of borrowers still struggling to service facilities in post-moratorium era, due to higher rates 
• Stresses need for banks to work with such clients for financial recovery
• Banks appear to be focusing on growth now, looking past peak NPLs and provisions

Although many clients have come out of the payment holidays offered to them, both since the Easter attacks and then during the pandemic, there is also a large pool of borrowers who are still struggling to repay because their loans were restructured at a time when the interest rates were at an exponentially high level, according to a top banker in the country. As a result, these clients genuinely find it challenging to service their facilities, as a significant cash outflow is required for them to meet their obligations during the post-restructuring period, according to Standard Chartered Bank of Sri Lanka Chief Executive Bingumal Thewarathanthri.

“There are clients who got the moratorium and settled and they are on their path to recovery. And others who took the money did various other things. So, they are wilful defaulters,” Thewarathanthri told a post-budget forum, speaking on the level of support extended by the banks in the crisis era dating back to 2019’s Easter bombings, when the banks first started offering moratoria to the tourism sector, which became the direct casualties of the attacks and then of the pandemic. “But I think there is a larger pool where they restructured (their facilities) but they genuinely can’t pay because we capitalised the interest at a time when the interest rates were very high. So, if you have restructured your loan at 20 percent and you definitely have a massive cash outflow and therefore there is no place for you to recover,” he explained. 

Sri Lanka, which experienced historically low interest rates for nearly two years since 2020, due to the massive monetary stimulus extended to those who fell victim to the pandemic-induced business closures and interruptions, was met with sky-high rates from 2022 onwards, as the Central Bank had to reverse course by tightening the monetary policy to combat the runaway inflation at the time.
As a result, those who enjoyed moratoria, some from 2019 and others from 2020, were confronted with massive outlays for their debt servicing when those payment holidays expired and such loans were restructured when the market lending rates were over 20-25 percent higher, in response to the ultra-tight monetary policy.
While some of the borrowers have completely gone out of business, due to the repeated shocks they had to deal with in the last three to four years, others who can be rescued must be assisted by the banks by working with them on a case-by-case basis.
Thewarathanthri said in such instances, both the banks and borrowers in distress must come together and put in place plans where the latter could be salvaged from the current predicament.