ECONOMYNEXT – Sri Lanka’s bank bad loans fell to 12.4 percent of loans in the third quarter of 2024 from 13.6 percent a year ago, while capital adequacy has improved steadily a central bank report showed.
Non-performing loans also fell absolutely to 1,400 billion rupees by end of the third quarter from 1,435 billion rupees a year ago. Provisions for NPLs increased to 735.8 billion rupees from 675 billion rupees.
Loans grew 6.9 percent to 21,204 billion rupees, and investment by 17.8 percent to 8,145.8 billion rupees in the year to the third quarter.
Following a currency crisis, banks usually buy government debt, reducing private credit.
Government debt is also bought from the central bank holdings (deflationary policy), reducing domestic investments, allowing the central bank to ‘buy’ deposits from banks, triggering a balance of payments surplus and allowing it to build reserves.
In the last currency crisis, some banks did not buy government debt as in the past fearing a restructure of local debt.
They deposited large volumes of money in the central bank’s window in what is referred to as a private sector sterilization or a liquidity trap, which also has the same effect.
In the run up to the crisis, the central bank buys Treasuries from past deficits ins bank balance sheets to inject money and cut rates, under flexible inflation or other framework and trigger forex shortages.
As rates are hiked steeply to restore the broken confidence in the exchange rate, usually accompanied by a depreciating currency which slashes real wages, consumption falls and many companies end up with bad loans as they are unable to service debt.
Bank capital adequacy has also improved. In addition to profits banks also raised capital from shareholders to boost capital.
Capital allows banks to resume lending leading to a recovery in the economy.
Sri Lanka central bank and other officials avoided a broad-based domestic debt restructuring restoring confidence in government securities allowing rates to fall and banks and other intermediaries to strong.
Rate fell fast and the central bank was also able to conduct deflationary policy more effectively unlike in countries like Ghana where both interest rates and inflation are above 20 percent.
Falling rates, in addition to reducing the budget deficit, also makes it easier for borrowers to repay loans.
There were concerns earlier that tax payer funds will have to be injected to banks to boost capital but profitability of banks have also improved.
State banks which gave loans to state enterprises however may need tax payer funds.
Up to the third quarter banks made profits of 178.4 billion rupees, up from 144.3 billion rupees a year earlier and paid corporate income taxes of 105 billion rupees, up from 77 billion rupees.
Bank also pay a so-called financial VAT which has the same effect as income tax on the balance sheet. (Colombo/Dec23/2024)
