ECONOMYNEXT – Sri Lanka’s banks will be re-capitalized if an ongoing study shows a need, Central Bank Deputy Governor Yvette Fernando said as lenders faced multiple shocks ranging from a Covid crisis, rate spikes, bond losses and bad loans from a slowing economy.
Sri Lanka’s banks gave debt moratoriums to customers during a Coronavirus crises where bad loans did not get classified under the usual rules, and in 2022 the impact of the currency crisis hit customers and interest rates also spiked leading to mark-to-market losses on fixed income security portfolios.
Sri Lanka central bank allowed mark-to-market losses to be staggered and the accounting body also allowed a concession.
“Currently due to the concessions and moratorium that is in place, we have not had the kind of proper assessment of the banking system,” Deputy Governor Fernando said.
“So there is an effort to do a diagnostic study especially on the big banks, the larger banks. And after that study we will be doing an assessment. And based on that assessment, if there is capital requirements needed, we have to go for the recapitalization also.”
“As of now we have allowed banks to use capital buffers and also to stagger certain impacts to the balance sheets because of the sudden impact due to the interest rate changes.”
Sri Lanka’s banks went into the Coronavirus crisis generally well capitalized with the central bank steadily setting rules for banks to boost capital over several earlier years. The larger ‘systematically important’ banks were required to have higher levels of capital.
In addition to mark-to-market losses on rupee bonds, some banks also have significant international sovereign bond holdings, which are due to be re-structured or given hair cuts. There is some uncertainty on whether rupee bonds will also be re-structured.
Domestic gilt rates are now around 30 percent.
The central bank says it is closely watching the impact.
“On an ongoing basis also we will be monitoring whatever changes that are going to happen in the interest rates and also the market developments,” Deputy Governor Fernando said.
“Wherever needed some facilitation will be provided while the diagnostic study will also happen. And based on the final outcome capitalization will also take place.”
Banks are due to report September quarter accounts soon. Most banks have put the brakes on new loans and private credit has been negative for the last three months. (Colombo/Sept07/2022)