COLOMBO: Bad loans at Sri Lankan banks are picking up in 2017 after two years of strong loan growth, with consumer spending hit by taxes, inflation and the recent floods, Fitch Ratings, a rating agency, said. Slower economic growth, interest rates and inflation could hurt asset quality, Jeewanthi Malalgala, a financial institutions analyst at Fitch Ratings Lanka, said. Fitch has a negative outlook for Sri Lankan banks. Larger banks have grown loans above their internal capital generation, hurting capitalization, Malalgala told a business forum in Colombo.
Much of the loans had been directed to retail and small and medium enterprise segments, where yields were higher. “These segments are, in our view, more susceptible to deteriorating economic conditions, especially with disposable incomes being squeezed by high taxes, inflation and rising interest costs,” Malagala said. Total non-performing loan growth numbers had been moderated by falling pawning-related bad loans. Housing and construction loans have also been growing fast. Although banks were providing for loans, it may be inadequate. There were also growing re-scheduled loans. Large banks had satisfactory loss absorption buffers, their risk-weighted assets were understated due to zero weights on pawning and forex loans to the state.
