ECONOMYNEXT – Bad loans at Sri Lanka’s banks had risen 64 percent in the first quarter of 2019, the worst since 2013 when gold-backed loans went bad, leaving lenders with thinner capital buffers, Fitch Ratings said.
But banks were also facing difficulties raising capital.
"Weaker asset quality and earnings will add to pressure on capital, and many small and medium-sized banks still need to raise equity capital to meet enhanced regulatory capital requirements by the end of 2020," Fitch Ratings said.
"However, they face execution risks since recent rights issues by Sri Lankan banks have been significantly undersubscribed, with investors deterred by macroeconomic instability.
"Our outlook for the sector remains negative."
Non-performing loans had risen to 3.4 percent by end 2018 from 2.5 percent by 2017.
Sector net profit had fallen 9 percent with impairment charges doubling.
"In addition, a debt-recovery levy imposed in late 2018 will push effective tax rates higher, further squeezing profits," Fitch said.
Small banks had higher bad loans Fitch said. Impaired loans to gross loans at small banks had climbed to 7.4 percent by end 2018.
At larger banks it was 6.9 percent, Fitch said.
"Sri Lanka’s small and medium-sized banks are under the greatest pressure," Fitch said.
"Their capital buffers are thin due to aggressive loan growth, muted earnings and rising credit risks, and their predominant exposure is to the retail and SME segments, which we believe are more vulnerable to economic downturns."
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