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Sri Lanka finance leasing NPLs spike to 14-pct in June 2020

ECONOMYNEXT – Sri Lanka’s finance and leasing company non-performing loans spiked to 14.14 percent in June 2020 from 11.37 percent in March, central bank data showed as a Coronavirus crisis and import controls took its toll in the economy after money printing in March and April.

Annualized return on assets had turned to a negative 2.31 percent in June 2020, from 1.86 percent March 2020, data showed.

In the finance company sector, where there are legacy bad loans from property lending and some firms failed, bad loans rose to 14.31 percent in June 2020 from 11.56 percent in March.

In the leasing companies bad loans spiked to 8.61 percent in June 2020 from 5.42 percent in March.

Sri Lanka’s finance and leasing company bad loans which rose to 7.56 percent in September 2014 after a 2012 currency crisis, fell to 5.14 percent credit picked up in 2015, boosted by pro-cyclical liquidity injections amid a deteriorating budget amid a policy shock called the ‘100 day program’.

But another currency crisis which hit in 2015/2016 drove bad loans back to 5.94 percent by December 2017.

In 2018 however bad loans in Sri Lanka’s banks and non-bank lenders picked up after Easter Sunday attacks hit tourism, even as the 2018 currency crises was being triggered with pro-cyclical liquidity injections.

The 2018 currency drove non-bank bad loans to 10.59 percent by December 2019 after which a policy shock involving a ‘fiscal stimulus’ and a debt moratorium hit the sector.

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The Coronavirus crisis hit the economy in the first quarter on top of the ‘fiscal stimulus’ which was then accompanied by liquidity injections which triggered severe import controls since the 1970s.

The policy shock involving the fiscal stimulus also triggered credit downgrade. Private credit is now negative. But domestic economy is functioning better than most economies with authorities controlling the spread of Coronavirus.

In 2019 Sri Lanka’s banking sector was also hit by a policy shock in the form of price controls on lending and deposit rates as the sector recovered from the 2018 currency crisis.

The finance and leasing company sector still had a capital based to risk weighted assets of 14.14 percent by June 2020, which improved from 12.54 percent in March.

Core capital to risk weighted assets grew to 12.9 percent from 11.19 percent as loans and advances fell. But return on assets deteriorated to negative territory.

Finance company assets fell to 1.39 trillion in June 2020, from 1.43 trillion in March.

Finance company annualized return on assets was a negative 2.37 percent in June from 1.86 percent in March, according to central bank data. In the Leasing company sector it was a negative 0.26 percent in June down from 7.13 percent in March.

Aggregate deposits in the sector have been falling from September 2019 according to central bank data.

Sri Lanka’s central bank has been monitoring the sector and officials have said options for strengthening the sector including mergers are planned.

Deputy Governor H A Karunaratne told reporters at the monthly monetary policy conference that finance companies have been ranked and a plan would be announced.

“There are a couple of avenues available,” Karunaratne said. “One is the consolidation.

“We have ranked the finance companies in to three. We have identified all the companies such as what are the strongest and weakest. First tier financial companies are companies having combination of companies.

“So, we would be indicating to the industry as well to come up with some proposals and in line with our suggestions because we have designed a plan.

“That is the consolidation also to have merges acquisitions and that type of frame work.”

The problems in finance companies in addition to monetary instability, also relates to regulatory forbearance in the past. The central bank has also been fine-tuning a resolution framework.

Early action before capital deteriorates helps arrest problems. In countries like the US the problem has been solved by mandatory resolution by Federal Deposit Insurance Corporation when capital falls to a threshold. (Colombo/Sept15/2020)