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Tuesday February 27th, 2024

Sri Lanka new single borrower limits seen having ‘drastic effect’ on private credit

ECONOMYNEXT – Sri Lanka’s planned tighter single borrower limits are a necessary prudential measure but it will tend to crimp lending as banks try to curb loans to large borrowers, an industry official said.

Sri Lanka is planning to reduce single borrower limits to 25 percent of Tier I capital from 30 to 40 percent of total capital, Murtaza Jafferjee, Chairman of Advocata Institute, a Colombo based think tank told an economic forum organized by the Ceylon Chamber of Commerce.

An analysis showed that for most banks the new SBL represented a 30 percent reduction, he said. The limit applies to group borrowing.

Drastic Effect

“This will have a drastic impact on lending,” Bingumal Thewarathanthri, Chairman of Sri Lanka Banks’ Association told an economic forum organized by the Ceylon Chamber of Commerce.

“This is bad news. The good news is that we are given three years to remediate the portfolio.

“So, 25 percent of Tier I is even for larger banks, for some banks it will come down by 35 to 40 percent. May be as an average 30 percent, SBL will come down.

“It will reduce the concentration. We completely understand that.”

About six banks in the country accounted for six trillion of lending, on a 10 trillion asset base and the balance 26 banks held about 4 trillion of the assets.

“Looking at the regional view, India is 25 percent, Bangladesh is 25 percent of Tier I, Thailand is slightly different,” Thewarathanthri said.

“We are an outlier in the region also. So we have to fix at some point. The question is should we fix it now?.”

In a recovery period, banks required space to operate, and getting capital next year may also be challenging he said with US rates also high.

“So, we see capital moving to the West,” Thewarathanthri said. “So we do not see large capital flows to the Sri Lankan banking sector immediately t in the first half. Timing-wise I do not know whether it is the right thing to do, the direction is definitely the right thing to do.”

Banks will have to share large exposures in the future.

“There will be more syndicates in the future,” he said. “And this will push smaller banks to mergers.”

Jafferjee said the rule was not imposed on state banks in the recent past which gave large loans to Ceylon Petroleum Corporation amounting to 100 percent of their capital or more.

Bank SOE-Nexus

The CPC was pushed to borrow from suppliers by authorities whenever the central bank cut rates with printed money to boost growth (target potential output under so-called flexible inflation targeting), despite not having significant dollar revenues, critics have said

The suppliers’ credits were then turned into loans from state banks as the letters of credit matured, officials have revealed.

The loans then made the entity run large forex losses as the currency collapsed from potential output targeting, even when fuel was market priced and the CPC had cash to buy dollars in some years, though in other years they have covered operational losses from subsidized fuel.

Related Shock revelation on how Sri Lanka’s CPC ended up with billions of dollar debt

In 2018 when politicians market priced fuel, the rupees were parked in state banks in repo deals, allowing them be loaned to other private creditors who imported goods, nullifying the effect on barring CPC from buying dollars in the first place, critics have said.

Sri Lanka’s CPC has been in the habit of borrowing dollars after printing money printing and a loan from Iran taken in the run up to the 1999/2001 currency crisis is still outstanding.

Under an International Monetary Fund this so-called Bank-SOE nexus is to be broken.

State bank dollar loans, given under Treasury guarantees, were taken to the government and is now a part of the national debt with the public called upon to pay more taxes to reduce “unsustainable” debt. They were

The new rule is likely to be applied to all banks with no regulatory forbearance.

Treasury Secretary Mahinda Siriwardana said under a new public finance management framework, broad improvement on the fiscal side is planned on multiple fronts.

Thewarathanthri said rupee lending to the government is likely to be excluded based on his understanding, and banks have also sought exceptions regarding dollar balances.

Sri Lanka’s private credit, which shrank in 2022 after rates were hiked, allowing foreign reserves to be built has now started to recover.

Lure of Credit

However, Thewarathanthi said banks were careful not to overburden customers with new loans and were careful to give loans which were immediately manageable, at time when bad loans were high.

“On credit to the private sector, the good news is we can see, month on month for the fifth month private sector credit growth is picking up,” he said.

“That is good news. But banks are reluctant on term lending at this point. They are supporting short term, supporting anything with underlying trade, underlying supporting documents. Gone are the days when you give 5-year working capital loans and large T-ODs.

“So banks are carefully looking at how the economy is stabilizing with NPL scenarios. So macro-stability is critical. Fiscal stability is critical – some work to be done.”

Policy consistency was also critical.

“We have got into situations where we have lent to projects and suddenly we realize that the tax concession is gone or a trade concession is gone. Or the land promised was gone.

“The hub concept is a classic one. There investors who got into the hub business, they realized it is not a hub. So, banks are careful in terms of understanding the policy consistency before you go into long term loans.

“Having said that there will be enough appetite from export credit agencies to look at large projects.

“Month on month it is growing. But banks do not want to grow at double digits when the economy is growing 3 percent next year. So you have to be careful, or again you might end up in an NPL scenario.” (Colombo/Dec04/2023)

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Sri Lanka parliamentary committee says electricity tariffs should be reduced by 20 pct

ECONOMYNEXT — A parliamentary Sectoral Oversight Committee on Alleviating the Impact of the Economic Crisis has recommended to the Public Utilities Commission of Sri Lanka (PUCSL) that electricity tariffs be reduced by at least 20 percent.

A statement from parliament said on Monday February 26 that, following an analytical review of the figures presented by the Electricity Board, Public Utilities Commission, etc. and taking into consideration all other factors affecting the price of electricity, including considering the opinion given by experts that the existing electricity price can be reduced by about 33%, price of electricity should be reduced by at least 20% in the year 2024 so that the state-run Ceylon Electricity Board (CEB) will not suffer any loss.

PUCSL officials have informed the Committee that by the end of this month, they can submit the necessary recommendations to reduce the electricity bill, according to the statement.

The matter was taken up for discussion when the committee, chaired by MP Gamini Waleboda, met in the Parliament on February 22.

Officials from the Ministry of Industry, Ministry of Finance, Central Bank of Sri Lanka, Public Utilities Commission, Industry Development Board, Enterprise Development Authority, Department of Population and Statistics, Department of Inland Revenue and from government institutions including the Micro, Small and Medium Scale Industries Board and a group of industrialists had also been called for the meeting.

“The Committee gave several directives to the relevant institutions and officials to identify the micro, small and medium scale industries that are directly affected by the economic crisis and to activate the local economy and increase the foreign exchange earnings by reviving the industry sector.

“The Committee pointed out that due to the increase in electricity bills, the number of electricity connection cuts reported across the island has exceeded one million. It was also emphasised that in order to alleviate the pressure on the industry and the society, it should be arranged to provide electricity connections again by charging only 50 percent of the outstanding charges at the initial stage with the concessional basis of payment of outstanding electricity charges on installment basis,” the statement said.

The committee was also of the view to allow the customer to pay the connection fee in installments so as to avoid discouraging new entrepreneurs to start micro, small and financial industries due to high charges for getting fixed electricity connection and instructed to review the new connection fee and work to reduce it as much as possible.

The committee chair has instructed the PUCSL to conduct an audit on the electricity consumption in the public sector as an approach to ensure energy security.

“The Committee recommended to the Ministry of Finance and the Central Bank to start a loan scheme at subsidised interest for the purchase of solar panel systems with a view to promoting solar energy as a source of energy supply to industries. The Ministry of Finance expressed its agreement to provide refinancing facilities subject to a maximum as per the proposal made by the Committee to implement a loan scheme targeting micro, small and medium scale industrialists under subsidized interest rates.

The committee has also recommended that raw materials that must be imported from abroad and impose tax concessions on such raw materials be identified to ensure the supply of raw materials required for the smooth running of micro, small and medium scale industries. Copper, lead, aluminum and other industrial scraps used as raw materials in various domestic industries currently being sold by the CEB to external buyers and other entities should also be issued to micro, small and medium scale industrialists recommended by the Ministry of Industry and the Industrial Development Board, the committee has recommended.

The definition used by the Department of Population and Statistics for micro, small and medium industries and the definition used by other institutions such as the Industrial Development Board and the Central Bank for those industries are different from each other, which is an obstacle in making policy decisions, the committee had noted, directing the Department of Population and Statistics to support to the policymakers by releasing statistical data based on a common definition.

“The committee also recommended that the Credit Information Bureau should take prompt action to remove their credit information from the blacklists so as to facilitate access to credit facilities for micro, small and medium scale industries facing financial crisis to activate their balance sheets and to review all existing laws and procedures for registration of micro, small and medium scale industries as well as to obtain licenses and introduce a simple system.

“The committee informed all the parties to establish a steering Committee headed by the Ministry of Industry to implement the recommendations given by the Committee and to report its progress within a week,” the statement said. (Colombo/Feb27/2024)

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Sri Lanka sets up fund to help children of Gaza

The United Nations Relief and Works Agency for Palestine Refugees in the Near East is mandated to provide education, health, relief and social services, and emergency assistance to refugees. (Pic courtesy UNWRA)

ECONOMYNEXT – Sri Lanka’s cabinet of ministers have approved a proposal by President Ranil Wickremesinghe to set up a fund to help children caught in the war in Gaza, a statement said.

The government will contribute a million US dollars and use funds allocated by state agencies for Ifthar celebrations.

Public contributions are also called.

The Presidential Secretariat is requesting public donations citizens for the “Children of Gaza Fund” to be contributed to account number 7040016 at Bank of Ceylon (7010), Taprobane Branch (747) by 11th April.

Deposit receipts should to be forwarded to 0779730396 via WhatsApp. (Colombo/Feb27/2024)

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Top US official calls for inclusive reforms, deeper defence ties with Sri Lanka

ECONOMYNEXT — United States Deputy Secretary of State for Management and Resources Richard Verma in discussions with Sri Lanka officials had called for inclusive reforms and stronger human rights and also discussed deeper defence and maritime cooperation.

The United States remains committed to the economic growth and prosperity of Sri Lanka, statement from the US Embassy in Colombo quoted the official as telling government, civil society and economic leaders during his February 23-24 visit to Sri Lanka.

“Verma met with President Ranil Wickremesinghe and Foreign Minister Ali Sabry to discuss progress on Sri Lanka’s IMF program, including inclusive economic and governance reforms aimed at keeping Sri Lanka on the path to sustainable economic growth.  Deputy Secretary Verma stressed the vital need to protect human rights and fundamental freedoms, including freedom of expression. They also explored opportunities to deepen defence and maritime cooperation between the United States and Sri Lanka, including strengthening the Sri Lanka Navy’s capabilities to safeguard national security and promote a more stable Indo-Pacific region,” the statement said.

 On February 23, aboard the SLNS Vijayabahu, one of three former U.S. Coast Guard cutters transferred by the United States to Sri Lanka, Deputy Secretary Verma said: “I am pleased to announce that the Department of State has notified Congress of our intent to transfer a fourth medium endurance cutter to Sri Lanka.  The Department obligated $9 million in Foreign Military Financing to support this effort.  We look forward to offering the cutter, pending the completion of Congress’ notification period.  If completed, this transfer would further strengthen defense cooperation between the United States and Sri Lanka.  The ship would increase Sri Lanka’s ability to patrol its Exclusive Economic Zone, monitor its search and rescue area, and provide additional security for ships from all nations that transit the busy sea lanes of the Indian Ocean.” 

 Participating in the announcement at Colombo Port were Sri Lanka State Minister of Defense Premitha Bandara Tennakoon, Commander of the Sri Lanka Navy Vice Admiral Priyantha Perera, and U.S. Ambassador to Sri Lanka Julie Chung, who remarked, according to the statement: “The United States has previously transferred three cutters to the Sri Lankan Navy, which deploys these ships for maritime operations and law enforcement missions, countering human trafficking and drug trafficking, while supporting humanitarian assistance and disaster response efforts. The eventual transfer of a fourth vessel would be just one more point in a long history of cooperation between Sri Lanka and the United States in preserving a free and open Indo-Pacific region.” 

Verma also visited the site of the West Container Terminal (WCT), a deepwater shipping container terminal in the Port of Colombo. The WCT, currently being constructed by Colombo West International Terminal (CWIT) Private Limited with 553 million US dollars in financing from the U.S. International Development Finance Corporation, will provide critical infrastructure for the South Asian region, the embassy said.

“Operating near capacity since 2021, the Port of Colombo’s new addition will be the port’s deepest terminal and aims to boost Colombo’s shipping capacity, expanding its role as a premiere logistics hub connecting major routes and markets, boosting prosperity for Sri Lanka without adding to its sovereign debt,” it said. (Colombo/Feb27/2024)

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