By:Staff WriterColombo (LNW): Sri Lanka’s Banks and Non Bank Financial institutions (NBFI) will be facing hug and grave losses with significant capital and and forex shortfall as result domestic or sovereign debt restructuring.
Moreover, banks net open foreign exchange position would deteriorate significantly as a result of sovereign debt restructuring, an independent expert analysis on IMF program divulged.
The depreciation of the rupee has increased the share of forex assets from 16 percent at the end of 2021 to 23 percent of banks assets.
Restructuring of public forex debt, or repayment in rupees could cause bank’s forex liabilities to significantly exceed their forex assets, the report revealed.
These forex shortage could lead to more losses if the rupee depreciates further and the banks are unable to secure sufficient forex inflows, it added.
Therefore banks and the authorities will also require a plan to close the net open forex position in the banking sector.
The Sri Lanka Banks’ Association (SLBA) has raised concerns over a possible Domestic Debt Restructuring (DDR) urging a proper evaluation and warning that additional risks to industry stability and public confidence must be avoided.
“The banks believe that all stakeholders involved in structuring the restoration of Sri Lanka’s Balance of Payments to a sustainable equilibrium must necessarily take a careful look at the resulting outcomes.
It is also essential to consider the impact to the banking sector capital and liquidity in a potential Domestic Debt Restructuring (DDR) and minimize the risk to the sector.
A further escalation of the situation we are in must be avoided,” SLBA said in a statement adding that banks have consistently supported the Government’s and CBSL’s efforts over the years through severe economic hardship that led to both public anxiety and political upheaval.
The impact should be assessed arising of debt repayment moratoriums, rescheduling of viable businesses and necessary recovery arrangements on generally disadvantageous terms predicated by the many incidents of inclement weather, post Easter Sunday 2019 attacks, COVID-19 pandemic, political, and social unrest.
“Credit impairments have hit an all-time high hitherto unseen. Taking further impairment costs on top of these strains on capital and liquidity is not sustainable especially with the tax deductibility of these necessary costs of being in business being uncertain,” SLBA warned.
“The banks reiterate that maintaining stability of the banking system is paramount at this time when extremely difficult decisions are being made,” it added.
SLBA said its members have asked for clarity on what is meant by “voluntary” debt optimization, is there a non-voluntary element and to whom does this apply (limited to the larger Treasury Bills/Treasury-Bond holders such as the superannuation and pension funds and State-owned banks).
More disclosure is essential on proposed Domestic Debt Optimization (DDO) and International Sovereign Bond (ISB) restructuring terms, what is the IMF’s view of Sri Lanka’s economic growth prospects over the duration of the IMF Extended Fund Facility (EFF).
It also asked whether the proposed DDO would resemble the experience of some other countries who have taken this route before us.