Banks are suffering an extreme liquidity crisis, which has been compounded by the country’s bigger macroeconomic problems.
According to senior bankers, this is a major reason why banks are not lending. “They are risk adverse,” a banker explained, stressing that banks are perplexed about what is occurring in the domestic debt market following the International Monetary Fund’s suggestions to restructure domestic debt, forcing them to be cautious when lending.
A bank CEO acknowledged that consumer lending by all banks has decreased. “In a crisis like this, a bank must be able to obtain loan interest rates of 32 to 33%.” However, in the current environment, no one will accept such high interest rates.”
A senior banker at a mid-sized bank stated that the cost-to-income ratio has increased significantly in banks due to rising overhead and property (such as branch upkeep) costs among low-income generation. The Central Bank Governor, he continued, also highlighted the economy contracting. “How can we build our business in this situation?”
According to an economist, recent tax rises such as income tax and corporation tax rates would undoubtedly generate roughly Rs 80 million in cash for the government in the next quarter, but most companies will go out of business due to such high taxes. “The sector will face headwinds until June of next year.”
Dr. Priyanga Dunusinghe, Economist at the University of Colombo, stated that the banking industry has provided some relief, such as a moratorium, to enterprises that are struggling to recover, and that savings deposits have also declined. “Many people do not have enough money to save throughout this crisis.” The lack of foreign exchange transactions as a result of the currency crisis has dampened that source of income, since migrant workers send money through informal channels has struck this economic sector hard.”