The Central Bank of Sri Lanka (CBSL) is investigating bank recapitalisation plans in the event of rising Non-Performing Loans (NPLs), with the economy expected to contract by 8% in 2022, according to CBSL Governor Dr. Nandalal Weerasinghe.
The CBSL Governor told Bloomberg Markets and Finance yesterday (22), that the Central Bank has been holding discussions with each bank in Sri Lanka, looking at their risks, uncertainties, and challenges, as well as how to recapitalize if necessary and the support the banks, require in such a situation.
He also stated that potential recapitalization plans are currently being discussed. However, he stated that banks are in a very good position and that they are currently exceeding the Basel III requirements, which include market discipline, supervisory review processes, and minimum capital requirements.
The Basel III framework addresses market liquidity risk, stress testing, and bank capital adequacy.
“Obviously, if NPLs rise, there will be some risks in the banking sector; we are in a position to handle this in collaboration with the banking sector to mitigate the risk,” Dr. Weerasinghe said.
Dr. Weerasinghe stated last week at the CBSL’s Monetary Policy Review that the CBSL expects NPLs as a percentage of all bank loans to reach 8% in 2022, up from 4.5% in 2021, and that the economy will contract by around 8%, a revision to its previous forecast of a 7.5% contraction.
Banks’ quarterly financials released in the last two weeks show a significant increase in impairments. Commercial Bank recorded impairment provisions of Rs. 35.2 billion for 1H 2022, and Rs. 29.3 billion for 2Q 2022 alone, while Sampath Bank recorded a total impairment charge of Rs. 28.2 billion, Bank of Ceylon recorded Rs. 49.5 billion in loan and advance impairment provisions, and HNB recorded Rs. 40.1 billion in 2Q 2022 impairment provisions.