ECONOMYNEXT – Sri Lanka’s banks have sought exceptions from planned tighter single borrower limits to place dollar balances overseas to manage large capital inflows, an industry official said.
Sri Lanka is to tighten single borrower limits to 25 percent of Tier I capital, from the current around 30 percent of total capital.
Banks are expected to be allowed to buy government rupee securities.
“We also lobbied to exclude Nostro balances, because when you get large inflows you have to park it somewhere,” Bingumal Thewarathanthri Chairperson of Sri Lanka Banks’ Association told the Sri Lanka Econommic Summit organized by the Ceylon Chamber of Commerce.
If a bank gets guarantee from a AAA rated outside entity, an exclusion also has been sought, he said.
“It does not make sense to include that in the SBL calculation,” he said. “Global banks might use the global capital pools and book some of the assets in Singapore and other places. Some of the local banks will not have that option. So, we have to be very carful in how we look at it.
“I think each bank has done some work and gone back to the regulator individually. The SLBA is also writing to the regulator in term of industry concerns.”
Sri Lanka’s banks are now flushed with US dollars after the central bank stopped printing money to mis-target rates and started to run largely deflationary policy.
Many banks have already parked cash in Nostro accounts, according to industry official say.
Sri Lanka banks also have to place deposits abroad to get letters of credits confirmed, after the last currency crisis.
Official data also show a sharp reversal in net foreign assets of banks over the past year.
Over several years before the latest currency crisis, banks and borrowed dollars and also used customers customer deposits to give loans to the to the government, through Sri Lanka Development Bonds and other credits to state enterprises, including the Ceylon Petroleum Corporation.
The government has since repaid some of the credits and banks have bought dollars to balance their net open positions leading to the build up of private reserves.
Building reserves, or repaying credit lines, by reducing domestic credit leads to a build up of foreign reserves and will reduce the current account deficit or turn it into a surplus.
Sri Lanka’s current account deficit is generally driven by foreign borrowings of the state.
Countries with depreciating currencies tend to destroy domestic capital (inflate away real savings), push up nominal interest, forcing them to rely on foreign borrowings, a process known as liability dollarization, analysts say. (Colombo/Dec07/2023)