ECONOMYNEXT – Sri Lanka’s budget proposal to limit gold-backed credit (pawning) to five percent of will reduce the risk for the island’s banks, Moody’s a credit rating agency said.
"The quality of these loans is directly linked to volatile gold prices, which makes them risky for banks," Moody’s said.
After gold prices collapsed banks have shrunk their gold-backed loan portfolios to 5.2 percent by June 2015, from 14.4 percent at the end of2013.
"The proposed 5 percent cap will further decrease banks’ exposure to these loans and will prevent excessive growth in this segment if gold prices increase," the rating agency said.
Moody’s said HNB and Bank of Ceylon rated by the firm will benefit from tighter rules.
"The second proposal mandates that banks cease consumer finance lending starting 1 June 2016," the rating agency said.
"Such loans are provided to individuals and are typically higher risk and unsecured. As of the end of June 2015, consumer finance loans composed around 5 percent of gross loans for the five largest banks engaged in consumer lending.
"Consumer finance lending has historically had poor asset quality relative to secured banking loans, reflected by the weaker asset quality of specialized Sri Lankan consumer finance firms."
It is not clear whether the rating agency was referring to a budget proposal to ban banks from giving leases. In a lease contract the lender owns the underlying asset until repayments are complete and it can be seized and sold.
No distinction was in the budget proposal made between personal and business leases. Banks typically get the better customers and so-called finance companies get the sub-prime borrowers.
Moody’s sad consumer finance loans composed around 5 percent of gross loans for the five largest banks engaged in consumer lending.
"For those banks, the growth in this segment has been rapid, averaging a compounded annual growth rate of 44 percent over the past four years, compared with 24 percent growth in gross loans excluding consumer finance." (Colombo/Nov30/2015)