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Monday March 4th, 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 rupee opens at 308.20/50 to the US dollar

Sri Lanka stocks reversed its falling trend and gained for the first time in six sessions on Tuesday closed stronger on Tuesday (21).

ECONOMYNEXT – Sri Lanka’s rupee opened at 308.20/50 to the US dollar Monday, from 308.80/90 on Friday, dealers said.

Bond yields were broadly steady.

A bond maturing on 01.08.2026 was quoted stable at 10.90/11.00 percent.

A bond maturing on 15.09.2027 was quoted at 11.90/12.00 percent from 11.90/12.05 percent.

A bond maturing on 01.07.2028 was quoted at 12.20/30 percent from 12.15/35 percent.

The Colombo Stock Exchange opened up; The All Share was up 0.60 percent at 10,755, and the S&P SL20 was up 1.24 percent at 3,077. (Colombo/Mar4/2024)

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Sri Lanka central bank swaps top $3.2bn by December

ECONOMYNEXT – Sri Lanka’s central bank borrowed US dollars from various counterparties through swap transactions, which had topped 3.2 billion US dollars by December 2024, official data show.

The net short position, including swaps disclosed by the central bank, grew by over almost 1.28 billion US dollars from December 2022 to 3,280 million dollars.

The gross position grew from 2,263 million dollars to 3,280 million US dollars over the year.

The central bank supported some state banks with dollars to cover their dollar exposures, which had since been paid back.

By December reported gross reserves of the central bank was 4,491 million US dollars, against swaps of 3,280 billion US dollars.

Swaps of around 1500 related to the People Bank of China.

Swaps allow a central bank to increase gross reserves, without raising domestic interest rates.

Swaps with domestic counterparties lead to liquidity being injected into money markets, which can be mopped if domestic credit growth is moderate.

At the moment many private banks have large dollar positions invested outside the country, which cannot be used for transactions domestically because of a money monopoly given to macro-economists. (Sri Lanka repays debt or collects reserves of U$5bn via banking system since rate correction)

However unwinding swaps after private credit has picked, or engaging in swaps after private credit has picked up, may lead to money being injected to maintain the policy rate, leading to excess credit by banks and balance of payments deficits and or currency collapses, analysts say.

Central bank swaps in the third quarter of 2018 led to a collapse of the currency under the ‘exchange rate as the first line of defence’ policy peddled to Sri Lanka, critics have said earlier.

Domestic currency proceeds of swaps were the primary ammunition to bust East Asian currencies in 1997-98.

Any depreciation after the swap proceeds have been used for imports (effectively mis-targeting rates) a central bank will run a forex loss.

The PBOC however had put a rule, preventing the use of the swap after gross reserves fell below 3 – months of imports, preventing Sri Lanka from getting into further trouble through the use of official reserves for private imports.

Sri Lanka’s central bank also used borrowings from the Reserve Bank of India, via the Asian Clearing Union to run BOP deficits.

Losses from exposed dollar positions of central banks which have gained ‘independence’ from fiscal rules and parliaments and engaged in macro-economic policy, including the Fed, have led to taxpayers bearing the losses in the end.

Swaps were invented by the Fed in the early 1960s, as it deployed macro-economic policy (printed money for growth) threatening its gold reserves and the Bretton Woods system.

Sri Lanka has other borrowings also, including from the IMF, which has made net foreign assets of the central bank negative. (Colombo/Mar05/2024)

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Sri Lanka loses MICE tourists to Thailand on minimum room rates

ECONOMYNEXT – Sri Lanka has lost Meetings, Incentive Travel and Exhibition travelers to competitors in East Asia and India due to minimum room rates as higher standard rooms were available in other countries at lower prices, industry officials said.

President of the Sri Lanka Association of Inbound Tourist (SLAITO) Nishad Wijetunga said they the industry managed to retain a majority of booking made before the minimum room rates were imposed by the state last year.

“However, there were MICE groups that were supposed to come and cancelled Sri Lanka and went to places like Thailand and other parts of India and we lost,” Wijetunga told EconomyNext.

“We know that large groups of MICE (tourists) are affected.”

India is a key source of MICE tourists to Sri Lanka.

Sri Lanka’s businesses have got used to protectionism and try to push up prices with import taxes to extract more money from customers using the coercive power of the state, with tiles and steel being among the most prominent examples.

RELATED: Stand-alone hotels unviable in Sri Lanka due to high construction, capital costs

High priced tiles and steel in turn makes hotels expensive to build and make the leisure industry less competitive, analysts say.

However, in tourism, unlike in building materials customers are not trapped within the country and are free to move to other markets.

Managing Director of CEC Events and Travels, Imran Hassan, said the industry lost groups to East Asia due to minimum room rate.

In one instance, an operator was in discussions to get a group of 900 passengers.

“And that moved out to Thailand,” Hassan said. “Like that, there are many instances that the minimum room rate was not conducive.”

Thailand in 2023 attracted 28.04 million tourists.

A group that used to come to Sri Lanka annually used to take 40 to 50 five-star hotel rooms. This time Sri Lanka competed by offering lower standard.

“This year, they’re only giving 10 rooms to the five-star hotels,” Hassan explained. “They are staying in smaller hotels because they can’t afford it because it has become so expensive.”

“But overall, we are working with the authorities to correct it.

“We don’t mind demand and supply situation taking the rates up as in the Maldives. But what we are saying is keep an open market.”

RELATED : Sri Lanka should say good bye to minimum room rates: President

President Ranil Wickremesinghe has said Sri Lanka cannot progress with protectionism and the country has to learn to face competition. (Colombo/Mar04/2024)

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