Sri Lanka SME debt relief credit negative for banks: Moody’s

ECONOMYNEXT – A debt moratorium for Sri Lanka’s small and medium enterprises is credit negative for banks and the sovereign, and may not boost economic growth, Moody’s a rating agency has warned.

“The debt moratorium is credit negative for Sri Lankan banks and the sovereign because it risks increasing SMEs’ risk appetite and relaxing their attitude toward debt repayments, ” the rating agency said in a research note.

“This in turn will undermine banks’ asset quality and constrain the sovereign’s credit profile.

SME activities made up for about half of Sri Lanka’s gross domestic product and employment.

“However, similar to our expectation on any macroeconomic benefits from the tax cuts announced for businesses and households, they are similarly unlikely to lead to significant and sustained acceleration in economic activity…” the agency said.

Among banks rated by Moody’s Hatton National Bank (B3 stable) and Sampath (B3 stable ) will be most affected by the moratorium.

Bank of Ceylon (B3 stable) will be least affected because it is lending mostly to state enterprises and large domestic companies, the rating agency said.

Sri Lanka bank bad loans from about 3.0 percent in 2017 to 4.8 percent in September 2019.

The debt relief applies to enterprises with loans of up to 300 million rupees and revenues up to 750 million rupees.

“The debt moratorium will help slow the banks’ nonperforming loan formation this year, but we anticipate an increase in bad debts when the grace period ends, especially if the domestic economic conditions remain weak,” Moody’s said.

The moratorium went further than relief offered by tourism.

Tourism is expected to contribute to the recovery. Moody’s expects Sri Lanka to grow 3.4 percent up from 2.6 percent in 2019. (Colombo/Jan21/2020)