Home » Central Bank suggests to infuse fresh capital to stop big bank rot

Central Bank suggests to infuse fresh capital to stop big bank rot

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Certain Sri Lankan banks might have to be infused with fresh capital after the conclusion of what the officials call a “diagnostic study”, Central Bank Deputy Governor Yvette Fernando

The study was launched into big banks to assess the extent of the implications coming from higher provisions made for losses on foreign currency-denominated financial assets and the additional losses stemming from possible bad loans.

The Central Bank has imposed new capital controls some times back limiting the movement of foreign currency out of the country for six months.

The move came as Sri Lanka faces a depreciating currency, a fragile reserve position and an increasing risk of default. The CBSL’s monetary board had advised to impose the restrictions.

Although there aren’t any imminent concerns about their stability, Sri Lanka’s banks are currently undergoing their most painful stretch of combined stress coming from the worst economic crisis the country, she added.

For instance, cracks were already seen in their asset quality as scores of borrowers fell behind their loan payments amid soaring interest rates and runaway inflation, together with the provisions made entirely for the investment they held in the SL government bonds.

Meanwhile, the growth prospects are muted except for certain pockets in the loan portfolio such as the gold-backed loans as the economy is on course to shed nearly 9.0 percent of its size by the year’s end, reflecting how deep the cuts on consumption and investment spending by the economic actors.

“There is an effort to do a diagnostic study, especially on the big banks. And after that study, we will be doing an assessment. And based on that assessment if capital requirements are needed, we have to go for recapitalization also,” said Central Bank Deputy Governor Yvette Fernando.

Amid these concerns, the Central Bank has undertaken a diagnostic study of all big banks including the two State commercial lenders to identify any potential capital deficiencies arising out of the above shocks.

Separate reports on the matter have shown that nine systematically important banks, including Bank of Ceylon and People’s Bank, are subjected to the said study and would be conducted by an auditor, different from the bank’s present external auditor.

If there are any signs of wanting fresh capital, the Central Bank officials said they may have to go recapitalizations.

“There is an effort to do a diagnostic study, especially on the big banks. And after that study, we will be doing an assessment. And based on that assessment if capital requirements are needed, we have to go for recapitalization also,” said Central Bank Deputy Governor Yvette Fernando

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