Sri Lanka’s commercial banks are now faced with debt default issues of borrowers hit by unprecedented income tax and corporate tax hike with Non-Performing Loans (NPLs) increasing beyond its control, several general managers of banks complained.
On top of these grave financial issue the Central Bank Governor Nandalal Weerasinghe says that Sri Lanka’s banks should explore restructuring loans of high income earning employees hit by progressive tax, Central Bank Governor Nandalal Weerasinghe said as progressive income taxes were imposed at lower thresholds amid high inflation following a sovereign default
The Central Bank of Sri Lanka (CBSL) forecasts Non-Performing Loans (NPLs) as a percentage of all bank loans to reach 8% in 2022, from 4.5% in 2021, while it expects the economy to contract by around 8%, in a revision to its previous forecast of a 7.5% contraction.
CBSL is working with banks to minimize the economic contraction’s impact on the banking sector as NPLs will rise as a result of the contraction, and added that the NPL ratio is forecasted to be 8% for 2022.
He said the economy would contract by around 8% 2022, surpassing the CBSL’s previous forecast of a 7.5% contraction.
He added that a sharper contraction of the economy means recovery can be faster from next year onwards, as Sri Lanka could start to recover in the second half of 2023, with attention to external factors such as a possible global recession, and the possibility of Sri Lanka maintaining normal economic conditions while sectors such as tourism make a fast recovery
Weerasinghe noted that picketing state enterprise executives have made complaints along with other workers of such agencies such as Sri Lanka Port Authority that high progressive taxes were resulting in making their bank accounts into overdraft after loan installments were deducted.
“Yes, they have mentioned that,” Governor Weerasinghe said responding to questions from reporters.
“We have told the banks earlier as well. Because the interest rates are high and their business being reduced, the SME sector, the repaying capability has reduced.
“We have told them to explore their repaying capabilities and restructure their loans in order to safeguard both sides. At this time also we are asking the banks to do that.”
Further some state owned enterprises used to pay the Pay-As-You-Earn tax, of salaried employees in the past.
It is not clear whether the volumes of loans involved were large enough to cause concerns.Bad loans of the banking system overall had risen after the rupee collapsed, reducing the spending power in the economy, while rates also went up as money printing was scaled back, foreign funding stopped and the budget deficit widened.
