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Overwhelming demand for Sri Lanka’s Covid-19 credit scheme: banker

ECONOMYNEXT – Demand is overwhelming for Sri Lanka’s central bank re-financed loan scheme to support struggling businesses impacted by the coronavirus pandemic, while a guarantee scheme will go a long way to ensure help reaches the most vulnerable, a banker says.

“There’s an overwhelming demand for the refinance loan, but given the limited allocation, the challenge then is to ensure the funds reach borrowers at the bottom of the pyramid,” says Ramesh Jayasekara, Senior Deputy General Manager at Seylan Bank.

Under the initial phase of the 50 billion rupees Central bank economic revival scheme, Seylan Bank received applications for 17 billion rupees worth of working capital loans and made loan registrations to the value of approximately 3 billion rupees, he said.

The initial refinance scheme was not large enough and has been now expanded to Rs120 billion.  If a credit guarantee is attached to this scheme, it may expand the reach and enable the vulnerable businesses that need low-cost credit to obtain funds,” Jayasekara says.

The government first announced the refinance credit scheme in April where the Central Bank would give new money at 1 percent to lending institutions for onward lending to vulnerable businesses at 4 percent.

The central bank said on June 16, that 27.5 billion rupees in loans been approved under the first 50 billion-rupee scheme. The government requested the central bank to extend the scheme to 150 billion rupees.

Jayasekara is confident of an economic revival and turnaround. The only dampener to that sentiment is the possibility of a second wave of COVID-19, which appears remote given how the country has managed the containment.

“Compared to many other countries, Sri Lanka is better placed for an economic revival. We’ve managed to arrest the spread of COVID-19 and come out of the lockdown much earlier compared to some other countries,” he says. “Yes, I believe the economic revival here will be quicker.”

Jayasekara says the economy is bouncing back strongly after the lockdown. While long term investments may be on review, normal economic activity has reached 70-80 percent of pre-COVID levels, he says.

“If economic activity gets back to normal by end July, then the recovery will be stronger,” Jayasekara says.

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Debt moratoriums

Earlier, a debt moratorium, ranging from two, three and six months, where borrowers don’t have to repay capital or interest, was given to banking clients on request.

Moratoriums account for about 40 percent of outstanding loans of the banking sector. For Seylan, it is around 50 percent of the loan book, Jayasekara says.

“The challenge is when borrowers come out of the moratorium period which could put portfolio quality under some stress,” he says.

“Those borrowers who did not qualify under direction No.5 of 2020 and opted for the 2-months moratorium in April must begin to service their loans from end June. Some of these borrowers may find it hard to service their bank loans.

“However, the deterioration of asset quality is likely to be higher towards the end of September when the six months’ moratorium for small and medium businesses expires,” Jayasekara says.

Non-performing loans as a percentage of total banking sector credit were 4.9 percent pre-COVID. “We now expect banking sector NPLs to increase by the end of 2020,” he said.

To contain rising NPLs, Seylan Bank is closely monitoring borrowers for signs of stress and will proactively modify loans to ensure clients maintain steady repayments going forward. Banks may even need to extend a grace period for capital repayments on a case-by-case basis for struggling businesses beyond the moratorium.

“We are working with our customers to really understand who might need support beyond the moratorium because if a business had symptoms of cash flow issues pre-COVID, I think that can only get worse post-COVID-19,” Jayasekara says.

“The SME sector will be the worst affected by COVID-19 and I believe the entire banking sector is prepared to support them to overcome their difficulties,” he said.

Larger corporates are better placed to absorb the pandemic-related shocks. They also maintain relationships with several banks ensuring multiple credit options. Jayasekara said some of these firms had even opted out of the moratorium scheme, preferring to service borrowings on pre-COVID terms.

Banking sector stress

Everyone recognises the need to provide credit stimulus to businesses struggling to stay afloat; especially SMEs which contribute over 50 percent to Sri Lanka’s national output and employs nearly half the working population. However, few appreciate the need to balance banking sector stability with the credit needs of the economy.  A bank’s priority is to safeguard depositor funds.

Credit demand has been flat, and bank deposit base erosion has been manageable as people reduced spending and consumed their savings when incomes took a hit due to the lockdowns. “Cashflow is not a problem right now for banks and there’s plenty of liquidity in the system,” Jayasekara says.

Prime lending rates are also sliding and expected to decline from around 9.2 percent to 8.5 percent. This will reduce the burden of interest costs for borrowers. “We expect the rates to be at these levels for the next one year or so making it fairly competitive”. Deposit rates will follow the trend, easing bank’s interest expenses, thereby helping to contain eroding margins.

The Central Bank reduced statutory reserve requirements in two instalments since the COVID-19 outbreak. Banking sector liquidity was in surplus of 200 billion rupees as at June 2020.

“There’s plenty of liquidity out there and the idea is to really start using this to revive the economy,” Jayasekara says.

But, small businesses complain they don’t have access to the concessionary loans scheme.

However, banks are required to follow stringent lending practices to ensure financial system stability. Which is why a credit guarantee scheme may be important so that vulnerable businesses have access to credit without stressing the banking system.

“The bigger the allocation the better because that money will directly go to SMEs who will create more economic activity. We really do not have to reinvent the wheel, we just need to follow certain countries who are ahead of us in some of these schemes,” Jayasekara says.

Sri Lanka’s central bank on June 24 said it had approved 28 billion rupees of subsidized credit to be issued from commercial banks under the refinance scheme which had been increased to 120 billion rupees from 50 billion rupees. The government had wanted the scheme extended to 150 billion rupees.

“The Central Bank has approved 13,861 loan applications under Phase-I of this Scheme, totalling 27.9 billion rupees, out of which the licensed banks have already disbursed 14.8 billion rupees among 7,274 affected businesses island-wide as of 24 June 2020,” the Regional Development Department of the Central Bank said in a statement.

Bad loans at banks rose to 5.1 percent of gross credit by March 2020 from 4.9 percent in December 2019, just when the coronavirus lockdowns were taking effect, official data shows.

The effects are more pronounced in licensed specialized banks where non-performing loans rose to 6.6 percent of gross-loans in March 2020 from 5.5 percent in December, central bank data showed. (COLOMBO, 25 June 2020)

(Additional reporting by Mahadiya Hamza, edited by Devan Daniel)

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