Home » Sri Lankan banks brace for low credit growth amid high cheque returns

Sri Lankan banks brace for low credit growth amid high cheque returns


The Sri Lankan banks are bracing for low credit growth amid the rise in interest rates, rating downgrades, new taxes and the quality of the portfolio, all of which have impacted the banks’ capital growth.

A senior banker says that banks are forecasting single-digit credit growth this year, compared to last year’s 16%. Sri Lanka’s commercial banks provided a record amount of credit to the private sector in 2021, a reported SLRs810.5bn.

In 2022, the banking sector is wrestling with exposure to the country’s sovereign debt and economic vagaries. Apart from credit growth, analysts predict that these factors will weigh heavily on asset quality.

The Sri Lankan banking sector is slowly losing credibility on the international stage, with correspondent banks reluctant to guarantee transactions with the low credit ratings of the country and its inability to raise funds in the international markets.

The country’s bankers say that overseas banks are requesting a third-party guarantee to honour local LCs. This is quite similar to the situation in the 1970s when all LCs issued by Sri Lankan banks needed to be guaranteed by a third-party bank based in Singapore.

Banks are working on raising long-term debt with a view to meet FX liquidity requirements to support local currency lending demand at concessionary rates for specific economic sectors, but they are increasingly facing difficulties.

Many bankers say development finance institutions’ (DFI) credit lines are slowly tapering off. Amid the exchange rate issues, as well as lack of reserves and liquidity in the banking industry, some commercial banks were in discussion with DFIs to secure credit lines and beef up their foreign reserves.

On average, Rs. 1 billion worth of cheques have been returned on a daily basis in the second quarter of 2022, as the overall cheque returns in Sri Lanka rose by 30% in the second quarter of 2022 (2Q22) compared to 1Q22, with the economy contracting by 8.4% in 2Q22, Central Bank data showed.

According to the payments bulletin released by the Central Bank of Sri Lanka (CBSL) for 2Q22, a total of 251,400 cheques have been returned during the quarter, with a total value of Rs. 59.6 billion compared to the 192,300 cheques returned in 1Q, indicating an increase by 30.7%.

The report also showed that the volume of cheques returned (as a percentage of the total volume of cheques received for clearing) increased to 3.2% in 2Q22 from 2.1% in 1Q22, while the average volume of cheques returned per day was 4,335.

The average value of daily cheques returned increased to Rs. 1 billion in 2Q22 from Rs. 681.3 million in 1Q22


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