ECONOMYNEXT- Sri Lanka’s central bank is engaged in discussions with the Institute of Chartered Accountants (CA Sri Lanka) over provisioning for bad loans among banks under a new accounting standard, in the wake of moratoriums initiated by the government.
Deputy Governor H. A. Karunaratne said the central bank had earlier expected no hit to banks from the loan moratoriums, but has now engaged in discussions with CA Sri Lanka over the nitty gritties of the SLFRS 9 accounting standard.
According to a 2018 Central Bank interpretation of SLFRS 9 loans which were restructured more than twice would become ‘stage 3’ loans with lifetime losses computed at amortised cost, compared to ‘stage 2’ loans of significant risk which are calculated at the gross carrying amount. Provisioning for performing loans are calculated based on a one year loss at the gross carrying amount.
Commercial Bank, Sri Lanka’s largest private lender, said the industry will have to brace for a growth in bad loan provisioning due to the loan moratoriums and low economic growth.
The government has currently two moratoriums extended to businesses; one for tourism businesses which started in 2019 due to the Easter Sunday terror attacks, and a more general loan moratorium which began in 2020 to help pick up economic growth.
The loan moratoriums restructure advances, freezing principle repayments for 12 months. Tourism businesses too have applied for the general loan moratorium to extend repayments when the industry moratorium ends in May.
With Sri Lanka’s economy having gone through a persistent period of low growth, stage 2 and stage 3 loans have grown.
Total bad loan provisioning in 2019 grew 48 percent to 61.2 billion rupees, denting bank profits amid price controls which squeezed net profit margins. (Colombo/Mar06/2020)