ECONOMYNEXT – Sri Lanka’s planned tighter single borrower limits are a necessary prudential measure but it will tend to crimp lending as banks try to curb loans to large borrowers, an industry official said.
Sri Lanka is planning to reduce single borrower limits to 25 percent of Tier I capital from 30 to 40 percent of total capital, Murtaza Jafferjee, Chairman of Advocata Institute, a Colombo based think tank told an economic forum organized by the Ceylon Chamber of Commerce.
An analysis showed that for most banks the new SBL represented a 30 percent reduction, he said. The limit applies to group borrowing.
Drastic Effect
“This will have a drastic impact on lending,” Bingumal Thewarathanthri, Chairman of Sri Lanka Banks’ Association told an economic forum organized by the Ceylon Chamber of Commerce.
“This is bad news. The good news is that we are given three years to remediate the portfolio.
“So, 25 percent of Tier I is even for larger banks, for some banks it will come down by 35 to 40 percent. May be as an average 30 percent, SBL will come down.
“It will reduce the concentration. We completely understand that.”
About six banks in the country accounted for six trillion of lending, on a 10 trillion asset base and the balance 26 banks held about 4 trillion of the assets.
“Looking at the regional view, India is 25 percent, Bangladesh is 25 percent of Tier I, Thailand is slightly different,” Thewarathanthri said.
“We are an outlier in the region also. So we have to fix at some point. The question is should we fix it now?.”
In a recovery period, banks required space to operate, and getting capital next year may also be challenging he said with US rates also high.
“So, we see capital moving to the West,” Thewarathanthri said. “So we do not see large capital flows to the Sri Lankan banking sector immediately t in the first half. Timing-wise I do not know whether it is the right thing to do, the direction is definitely the right thing to do.”
Banks will have to share large exposures in the future.
“There will be more syndicates in the future,” he said. “And this will push smaller banks to mergers.”
Jafferjee said the rule was not imposed on state banks in the recent past which gave large loans to Ceylon Petroleum Corporation amounting to 100 percent of their capital or more.
Bank SOE-Nexus
The CPC was pushed to borrow from suppliers by authorities whenever the central bank cut rates with printed money to boost growth (target potential output under so-called flexible inflation targeting), despite not having significant dollar revenues, critics have said
The suppliers’ credits were then turned into loans from state banks as the letters of credit matured, officials have revealed.
The loans then made the entity run large forex losses as the currency collapsed from potential output targeting, even when fuel was market priced and the CPC had cash to buy dollars in some years, though in other years they have covered operational losses from subsidized fuel.
Related Shock revelation on how Sri Lanka’s CPC ended up with billions of dollar debt
In 2018 when politicians market priced fuel, the rupees were parked in state banks in repo deals, allowing them be loaned to other private creditors who imported goods, nullifying the effect on barring CPC from buying dollars in the first place, critics have said.
Sri Lanka’s CPC has been in the habit of borrowing dollars after printing money printing and a loan from Iran taken in the run up to the 1999/2001 currency crisis is still outstanding.
Under an International Monetary Fund this so-called Bank-SOE nexus is to be broken.
State bank dollar loans, given under Treasury guarantees, were taken to the government and is now a part of the national debt with the public called upon to pay more taxes to reduce “unsustainable” debt. They were
The new rule is likely to be applied to all banks with no regulatory forbearance.
Treasury Secretary Mahinda Siriwardana said under a new public finance management framework, broad improvement on the fiscal side is planned on multiple fronts.
Thewarathanthri said rupee lending to the government is likely to be excluded based on his understanding, and banks have also sought exceptions regarding dollar balances.
Sri Lanka’s private credit, which shrank in 2022 after rates were hiked, allowing foreign reserves to be built has now started to recover.
Lure of Credit
However, Thewarathanthi said banks were careful not to overburden customers with new loans and were careful to give loans which were immediately manageable, at time when bad loans were high.
“On credit to the private sector, the good news is we can see, month on month for the fifth month private sector credit growth is picking up,” he said.
“That is good news. But banks are reluctant on term lending at this point. They are supporting short term, supporting anything with underlying trade, underlying supporting documents. Gone are the days when you give 5-year working capital loans and large T-ODs.
“So banks are carefully looking at how the economy is stabilizing with NPL scenarios. So macro-stability is critical. Fiscal stability is critical – some work to be done.”
Policy consistency was also critical.
“We have got into situations where we have lent to projects and suddenly we realize that the tax concession is gone or a trade concession is gone. Or the land promised was gone.
“The hub concept is a classic one. There investors who got into the hub business, they realized it is not a hub. So, banks are careful in terms of understanding the policy consistency before you go into long term loans.
“Having said that there will be enough appetite from export credit agencies to look at large projects.
“Month on month it is growing. But banks do not want to grow at double digits when the economy is growing 3 percent next year. So you have to be careful, or again you might end up in an NPL scenario.” (Colombo/Dec04/2023)