Sri Lanka’s banking regulations strong, economy weak: Fitch
ECONOMYNEXT – Sri Lanka’s banking regulations are relatively strong compared to peers like Mongolia and Vietnam but macro-prudential indicators by Fitch Ratings have a negative outlook due to the weak economic environment, the ratings agency said in a report ‘APAC Banks Regulatory Compendium – Update’ released Monday.
"Sri Lanka’s regulatory framework is a relative strength, yet we have kept a negative outlook on the assessment due mainly to its weak economic environment, Fitch Ratings said.
"In contrast, Vietnam and Mongolia have made slower progress in the adoption of more robust regulatory frameworks, yet both benefit from better economic prospects," it said.
Macro-prudential rules, which are often focused on property and supply of credit, have the potential to affect the operating environment and banks’ credit profiles more than Basel standards, the ratings agency said.
Sri Lanka’s operating environment is rated b+ with a negative outlook, trailing the sovereign rating of B+ with a stable outlook.
Sri Lanka’s macro-prudential and other regulatory initiatives include the Active Liability Management Bill passed in Parliament.
Through this new bill, Sri Lanka’s public debt sustainability is to be managed at a national level.
The most recent policyrate hike was in March 2017 when the Standing Lending Facility Rate (SLFR) and Standing Deposit Facility Rate were raised by 25 basis points, but the SLFR was reduced by 25 basis points in April 2018, Fitch said.
Limits have also been placed on banks’ foreign-currency borrowings.
These borrowings as a percentage of total assets are now a function of the sum of scores assigned for each licensed bank based on the external long-term credit rating and the total capital ratio of the bank, Fitch noted.
Sri Lanka banks are now allowed to offer/charge interest rates for their credit products as per their policies.
In 2012, the Central Bank of Sri Lanka (CBSL) placed interest-rate caps on certain products such as credit cards and housing loans.
There no changes to the main Basel III capital guidelines, Fitch notes.
"Implementation of all capital-based requirements is likely by 1 January 2019, asplanned. Banks would need to meet the enhanced capital ratios which would include the 2.5 percent capital conservation buffer and 1.5 percent additional capital buffer for domestic systemically important banks which are being phased in," the ratings agency said.
Fitch said a leverage ratio consultation paper has been issued to the banks, and the direction is likely to be issued within 2018.
In a separate statement issued last Thursday (12 July) Fitch said Sri Lankan banks faced challenges due to slower economic growth, weak consumption and regulatory reforms which will require fresh capital of about 19 billion rupees.
"Sri Lankan banks face challenges due to slower economic growth and pressure on disposable incomes," Fitch Ratings said.
Capital requirements for Sri Lankan banks have increased due to the implementation of Basel III and the shift to SLFRS 9 in 2018 could add to capitalisation pressures through a possible significant one-time adjustment, and drive a structural increase in normalised credit costs, Fitch said. (COLOMBO, 16 July 2018)