Sri Lanka bank risk capital overstated, floors of key lenders may be raised: Fitch Ratings

COLOMBO (EconomyNext) – Capital adequacy floors for key Sri Lanka banks may be raised by the regulator, and the reported capital ratios of lenders did not fully reflect the risks of some loans, Fitch Ratings has said.

Fitch Ratings said report capital adequacy ratios were higher than the 5 percent for core and 10 percent with second tier capital, and they were mostly of the core capital.

The Central Bank is likely to bring additional capital requirements for systemically important banks, Fitch said, under Basel III rules, Fitch Rating said.

But Sri Lanka’s high reported capital adequacy numbers were boosted by the absence of capital charges on some loans.

"The zero risk-weight attached to gold-backed loans and foreign currency-denominated exposures to the sovereign, in particular, mischaracterises the risks associated with such exposures," the rating agency said.

"This was evident in the spike in NPLs (non-performing loans) from gold-backed advances in recent years due to declining gold prices."

If the risk weights were applied, core capital would be down by about 3 percent.

"The reduction would be particularly significant in the case of the large state banks," the agency said.

"Residual provisioning risks, credit concentrations and a volatile operating environment remain as significant challenges for Sri Lankan banks over the medium term, and highlight the risks associated with relatively low capital buffers."

"These risks are reflected in the intrinsic financial profile or Viability Ratings of the major Sri Lankan banks which are mostly in the single ‘B’ range."