By:Staff WriterColombo (LNW): Sri Lankan banks rebounded from the impact of the pandemic with strong revenue growth and improved profitability in the first quarter this year.
This trend continues since the end of last year with the bank’s balance sheet in Sri Lanka increasing to Rs 1.59 trillion in December from 1.58 trillion in November of 2022, central bank sources said.
The IMF is of the view that Sri Lanka’s financial system is heavily exposed to the public sector, moderately capitalized, and could face material capital and forex shortfalls following debt restructuring.
Consequently, there is a possibility that banks could face significant capital and forex shortfalls as a result of a sovereign debt restructuring.
Therefore, plans are under way for the capital restoration of systemic banks following asset quality reviews to strengthen the resilience of the state owned banks. Meanwhile, financial sector supervision and the crisis management framework will be strengthened to make Sri Lanka’s financial system more robust.
However, the context changed dramatically in 2022 due to a series of shocks in the operating environment, including sharp economic contraction, downgrading of the sovereign rating, liquidity constraints in both rupee and foreign exchange markets, spiraling inflation which required sharp interest rate increases, and so on.
In the local banking industry, state-owned banks play a crucial role in promoting financial inclusion, supporting economic growth, and ensuring stability in the banking sector while working closely with the Government To implement policies and programs that promote development and social welfare of the country.
The state banks having almost 49 percent of the total assets of the banking sector (comprising licensed commercial banks and licensed specialized banks) continued to dominate the banking industry in 2022.
However, due to the adverse macroeconomic conditions that prevailed in the economy and other negative factors affecting the banking industry in 2022, the state banks faced significant pressure in managing liquidity, profitability, and capital adequacy.
During 2022, the total profitability of the state owned banking sector decreased by 43.5 percent to Rs. 59.2 billion compared to the Rs.104.9 billion in 2021.
This was mainly due to the drop in net interest margin and increased impairment of investments in foreign currency denominated Government securities.
The state banks contributed to 30.8 percent of the total profit earned by Sri Lanka’s banking sector in 2022.
The state banks’ combined branch network, including service delivery points, expanded to 1,924 by addition of 4 new branches in 2022 while almost all the banks adopted digital platforms to serve their customers.
With Sri Lanka’s economy still subdued—and political uncertainty prevailing—banks continue to be presented with clear credit risks amid a fragile operating environment.
According to S&P, the Sri Lankan banking system’s nonperforming loans (NPLs) were estimated at 4.5 percent of total loans at the end of last year. This figure is almost certain to have risen since then
Banks also play a crucial role in Sri Lanka by absorbing remittance payments from Sri Lankan expatriates working abroad.
According to the central bank, such remittances have been a “key pillar of Sri Lanka’s foreign currency earnings”, providing a substantial cushion against the trade deficit and thereby enhancing the external-sector resilience of the country.