What promised to be a year of economic revival, 2020 brought the coronavirus pandemic to Sri Lanka instead. Dimantha Seneviratne, NDB Bank’s Group Chief Executive Officer, who is also the current Chairman of Sri Lanka Bank’s Association (Guarantee) Limited (SLBA), argues that the banking sector is not stressed, but the next two years will be tough.
With the recent reduction in statutory reserve requirement, the banking sector has ample liquidity. But the next year or two will be tough for banks. In the medium-term, banking sector net interest margins may decline to below 3%, on the back of lower interest rates, after hovering around 3.5% – 4% levels over the last five years and return on assets will decline from 2% to 1.5% during this period.
Industry non-performing loans (NPLs) rose to 5.1% in March 2020 before the pandemic, which was an unprecedented situation. It came at a time when banks were already saddled with sizable stressed portfolios coming from two years of low economic growth. Banking sector NPL’s have been rising from 2.5% in 2017 to 4.7% in 2019.
There was already a moratorium given to the tourism sector, after the unfortunate Easter attack in April 2019. With the change of government later that year, another moratorium for SMEs came into play. In March 2020 came the unprecedented situation we are in today. With little credit growth during lockdowns and afterwards as well, also with the moratoriums in place till September, banking NPLs are not likely to increase by much.
After September some customers may yet come out the moratorium unable to service their loans and it’s likely we will see a spike in NPL’s. We are monitoring the unfolding situation and how it affects our customers. Meanwhile, we are building our capital and strengthening our underwriting standards and teams to proactively manage these accounts for the months ahead. We are taking proactive measures to contain possible risks and engaging with our customers to explore how best we can take care of their needs and help them navigate this period successfully.
From NDB’s portfolio, around 40% of loan portfolio opted for the moratorium but I must say several clients opted out of it as well. This is a regulatory-driven moratorium.
However, if any customer is in genuine distress, a client-centric bank will always support them throughout this difficult period. That support may even extend beyond this year. For instance, the tourism sector will need support beyond six months. Some customers are innovative and nimble enough to get out of tight spots fast.
Our customers in the apparel industry contained falling orders by switching to personal protective gear and managing fixed costs. But most businesses cannot do that and will need support from their banks. The Rs50 billion refinance scheme earlier announced seems insignificantcompared to total banking sector loans at Rs9 trillion. In late June, the Central Bank increased the refinance scheme to Rs150 billion and also arranged for a credit guarantee scheme, a request that the industry made post-COVID. This is a welcome move.
Earlier for the refinance scheme, the Central Bank had to approve all the loan applications vetted and submitted by the banks. But now, the banks will make credit decisions themselves, but of course, for the funding at 4%, we have to rely on the refinance and other interest subsidy schemes. Furthermore, for several customers, we have extended relief beyond the mandates of the moratorium and refinance credit scheme because we have a responsibility towards our clients.
Financing a stimulus or further relief package will be challenging for the government at this juncture. We must meet maturing external debt liabilities amidst a downgrade of the country’s credit ratings. The government’s tax revenue has also declined because of the various concessions introduced after the elections last year in a bid to revive a struggling economy even at that time. Economic management will be critical in the next few months.
The economy will decline in 2020 and growth will likely be below 2% for the better part of next year. Several industries have struggled even before COVID-19 such as construction and tourism and things are likely to get worse. Hence, the success of the moratorium and refinance scheme will depend on the economy’s ability to recover beyond September.
Borrowers need to be able to pay back their loans so that banks can manage credit quality and liquidity in the market and this level of confidence is critical for credit growth, economic expansion and stability of the financial sector.