By: Staff Writer
January 04, Colombo (LNW): Sri Lanka banking sector, which was adversely affected by the spillover effects of the recent economic crisis, continued to operate amidst challenging conditions while some signs of improvement were observed during the year ending Q3 of 2023, Central Bank report revealed. .
Credit granted by the banking sector contracted during the period albeit some recovery was observed within Q3 of 2023. Credit risk of the banking sector as indicated by the Stage 3 Loans Ratio remained elevated, reflecting deteriorated debt servicing capacities of economic agents due to shrinking balance sheets amidst adverse economic conditions.
However, stabilisation of credit risk was witnessed during Q3 of 2023 as indicated by the slowdown in the increase of Stage 3 Loans.
Meanwhile, credit concentration risks persisted within the banking sector with some high credit concentration on certain sectors, namely, construction and agriculture, posing higher vulnerabilities due to economic and climate related issues.
In addition, the high exposure of the banking sector to the sovereign posed concerns for the sector, which necessitated the exclusion of banking sector investments in Treasury bonds from the restructuring perimeter. CB report disclosed.
Increased investments in Rupee-denominated Government securities resulted in a significant increase in liquidity ratios of the banking sector while overall utilization of Standing Lending Facility by the banking sector reduced significantly.
FC operations of banks also witnessed a contraction during the period under review, particularly due to the significant decline in core FC assets despite the banking sector accumulating substantial amount of FC resources in the form of balances with financial institutions abroad.
Meanwhile, profitability of the sector improved with reduced new impairment charges compared to the previous year though comparatively lower impairment may have negative consequences for future profitability of the sector.
Furthermore, several banks including two Domestic Systemically Important Banks (D-SIBs) reported a decline in profits during the period.
Capital adequacy of the banking sector improved as a result of the decline in risk weighted assets, primarily due to the decline in exposures to corporate and retail loans and receivables, although a significant decrease in the Capital Adequacy Ratio (CAR) was observed in D-SIBs during Q3 of 2023
Going forward, banks are required to focus on strengthening their capital buffers supported by profit generation, considering the potential losses due to debt restructuring, results of the bank diagnostic exercise, and realisation of forward-looking impact assessment, which would raise recapitalisation requirements within the banking sector.
