Sri Lanka debt relief impact on provisioning, bank profits mixed
ECONOMYNEXT – Relief given by banks to performing customers under a government debt moratorium offered for loans up to 300 million will not require provisions under accounting rules, Deputy Governor Nandalal Weerasinghe said.
Relief of up to a year has been promised under the scheme for both non-performing loans (NPLs) and customers who are repaying but are in difficulties.
Sri Lanka is under tighter accounting rules in line with International Financial Reporting Standards, where restructured bad loans cannot be immediately recognized as performing loans.
The central bank has consulted bank auditors to find the impact on banks from the accounting treatment.
“And what they are saying is that there are no impacts on the financial status of the banks if they are giving the moratorium to performing loans,” Weerasinghe said.
“Because they are collecting interest and there is no impact on the balance sheet.”
But when relief is given for loans which are already non-performing provisions will still have to be made.
Overdue interest on bad loans is expected to be capitalized as a re-structure loan and interest would be paid on the total.
“That treatment has an impact on the balance sheet in terms of provisioning,” Weerasinghe said.
By end October commercial bank bad loans were about 4.9 percent of total assets up from 3.6 percent a year earlier.
Sri Lanka’s government is asking banks not to sell collateral on bad loans, which will give more time for those in difficulty to recover their businesses. (SB-Colombo/Dec30/2019)