ECONOMYNEXT – Bad loans in Sri Lanka’s banking sector have peaked, though there is an increase in specialized banks, and capital buffers have strengthened, by the December quarter of 2024, official data shows.
Stage 3 non-performing loans in Sri Lanka’s banks fell to 12.1 percent of total advances in the by December quarter from 12.7 percent in the September quarter, after peaking at 13.9 percent in the September 2023 quarter at 13.9 percent.
However, Stage 3 bad loans at licensed specialized banks climbed to 12.3 percent by the end of the December 2024 quarter from 11.9 percent in the third quarter for reasons that are not clear.
The NPL ratio is a result of both new bad loans, perhaps going up from State 2 to State 3 as well as the grown in advances.
The total rupee volume of the entire banking sector was 1,411 billion rupees in December, unchanged from 1,409 billion in the previous quarter.
Some commercial banks started to aggressively grow their loan books in the last quarter.
Bank may cut their investments to grow their loan book, leading to upward pressure in market interest rates.
The central bank in the past had tended to print money to try to push down interest rates and trigger forex shortages, reserve losses as banks favour private credit over Treasuries.
The suppression of interbank market through open market operations rate cuts then trigger a full blown currency crisis if continued amid strong private credit growth which then result in bad loans in the stabilization crisis that has to follow.
In past currency crises the central bank had bought large volumes of investments (Treasuries) from past deficits to inject liquidity to drive private credit not only targeting a mid-corridor rates through but also further down the yield curve through outright purchase operations.
To mis-target rates, Treasury securities issued to finance past year deficits are bought, though current year deficits are blamed. In 2018 an emblematic year, deficits were cut and fuel was market priced, as money was printed for rate cuts
The central bank also injects money through dollar rupee swaps, as the Lebanon central bank did through dollar deposits, analysts have pointed out, to suppress rates.
Bank profitability increased in the December 2024 quarter with return on equity rising to 15.6 percent from 12.5 percent in September.
The December quarter saw debt restructuring, where several banks made one-off profits as sovereign bonds were restructured.
Return on equity of commercial banks went up to 15.7 percent in the December quarter, from 12.3 percent in September.
At licensed specialized banks, return on equity fell to 14.3 percent in the December 2024 quarter after improving to 15 percent in September from 13.8 percent in the June quarter. (Colombo/Apr12/2025)
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