CB rejects S&P report on banking sector

A statement issued by the Central Bank of Sri Lanka(CBSL) rejected the latest Sand P report on the stability of the banking sector. The statement issued by the CBSL said that it noted the contents of the Report with grave concern. The S and P report on the Sri Lankan banking system is factually incorrect, illogically analysed, and contradictory, the statement issued by the Bank's Supervision department stated.

The CB has responded to the S and P report under four titles; Soundness of the banking system, Regulatory framework governing licensed banks, Supervision of banks, Mandatory deposit insurance and Regulation and supervision of licensed finance companies and specialised leasing companies.

The Report warned Sri Lanka and India over fiscal and external deficit and said that with expected high prices and related subsidies, it will markedly worsen fiscal and external deficits unless subsidy levels fall and in the absence of offsetting positive developments, these sovereigns could see negative rating actions as a result.

However, the warning is on the assumption of a situation, if oil prices hit around $150 per barrel and prices remain at that level for at least a year. The real situation in the petroleum market is different and oil prices were declining and was below $90 per barrel last week. The Report also pointed out that the cost of living in recent months was increasing as a falling rupee forced price increases in essential food.

The CB statement stressed that the banking system was sound and resilient and the banking industry was improving over the past few years.

It has highlighted improvement in key financial indicators from 2007 to March this year. Accordingly, the annual growth of assets has increased from 16.9 percent in 2007 to 24.4 percent in March 2012. Deposits growth increased from 16.5 percent to 21.6 percent, loans and advances ration from 18.9 to 35.5, core capital adequacy ratio from 12.6 to 13.3, total capital adequacy ration from 14.1 to 14.9, gross non performing ration from 5.2 to 3.9, net non-performing ratio from 2.4 to 2.2, provisions coverage from 64.5 to 54.3, statutory liquid assets ratio 30.4 to 31.6, interest margin from 4.4 to 4.1, return on assets (after tax) from 1.1 to 1.8 and return on equity (after tax) from 14.0 to 21.1.

The CB statement also said that the capital base of the banking sector has increased nearly two-fold since 2007 with the introduction of Basel Capital Standards and enhanced minimum capital requirement for banks. Profitability of the banking sector, which has continuously increased, has further reinforced the level of capital. These factors have contributed to the improvement in capital adequacy ratios despite significant growth in assets.

The authorities were implementing a bold package of policy measures to curb the current account deficit and to safeguard reserves

These measures were yielding fruit. Credit growth has slowed and imports have declined. Given the new policy framework—in particular the pursuance of exchange rate flexibility—as well as continued strength in remittances and success in attracting capital inflows, international reserves at the Central Bank have now stabilised. Government revenue collections and interest expenditure is under pressure, but the authorities remain committed to meeting their deficit targets.

“The Sri Lankan economy should grow by around 6¾ percent this year, as tighter macro economic policies work to ease demand to a more sustainable pace. The uncertain global environment poses a downside risk, but the rupee depreciation should provide a boost to the economy going forward. Inflation is likely to rise to the upper single digits, and we thus see the need to keep monetary policy focused on inflation pressures for the time being.

While the transition has caused difficulty to many segments of society, we share the authorities’ assessment that the new policy framework will strengthen the fundamentals of the economy and lay the basis for sustained economic growth.

We note that the core capital ratio and total capital ratio of 5 percent and 10 percent imposed by the Central Bank are more stringent than international standards.

Liquidity of the banking system has been well-managed with the statutory liquid assets ratio being maintained well above the limit of 20percent.

The growth in deposits and significant representation of retail deposits, further support liquidity risk mitigation,” a spokesman for CB said.