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Sri Lanka bank impairments to grow on loan moratorium

ECONOMYNEXT- Sri Lanka’s banking industry would have to brace for a growth in provisioning for bad loans (impairments) as credit gets restructured under government relief programs, an industry official said.

“Impairment costs will continue to rise,” said Sivakrishnarajah Renganathan, managing director of Sri Lanka’s largest private lender Commercial Bank.

He was responding to a question EconomyNext raised on the impact of relief program on loan provisioning.

According to a 2018 central bank interpretation of the SLFRS 9 standard on recognition of bad loans, advances which are restructured more than twice become ‘stage 3’ loans with higher impairment charges, charged to profit and loss accounts.

However, the central bank in 2019 in another interpretation, said that loans smaller than 25 million rupees restructured twice until end-June 2020 will be exempted from being moved to stage 3.

The loan moratorium program which came into effect in February allows for the restructuring of loans of up to 300 million rupees, creating a possibility of larger loans being recognized as credit impaired and moved into stage 3.

The moratorium allows for restructuring of both performing and non-performing loans, halting principal payments until December 31, while interest repayments continue under the low average weighted prime lending rate (AWPLR).

The government has provided the loan moratorium for small and medium scale enterprises to recover from a period of low growth, which was further exacerbated by the Easter Sunday terror bombings.

Pressure will build on impairments, after banks had to account for higher provisions in 2019 as well, Renganathan said.

“Impairments are expected to go up until the real economic revival takes place,” he said.





“The recent coronavirus issue is another major challenge and the impact is yet to come out.”

The banking industry provisioned 61.2 billion rupees in 2019, up 48 percent from a year earlier.

Another possibility of higher impairments would arise from tourism loans, Renganathan said.

Following the Easter Sunday bombings in April, the tourism industry faced the stiffest challenge in over a decade, with visitor arrival levels falling 20 percent amid steep discounts for services and room rates.

The government in May 2019 offered a loan moratorium for all tourism businesses which had registered with the state.

The tourism loan moratorium will last till end-March, and such businesses may avail themselves of the more general moratorium which began in February, raising the possibility of tourism loans larger than 25 million rupees which are restructured twice to be impaired as stage 3.

While the restructuted loans are at AWPLR which does not match their risk, Renganathan said the government removing the Debt Repayment Levy gave banks space in their accounts.

In 2020 most banks are expecting stronger loan growth. Commercial Bank itself is expecting up to 12 percent loan growth. Stronger loan growth will bring down the share of non-performing loans.

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