Sri Lankan banks are to a great extent spared from the world economic downturn due to the sectors unsophisticated nature and vigilance of the regulator, the Central Bank, said the President of the Sri Lanka Bankers’ Association, Rajendra Theagarajah. "Sri Lankan banks are greatly spared from the financial crisis in the west because the banking industry is less sophisticated in terms of structured finance and investments in structured products and because the regulator is quite vigilant and engages local banks regularly with issues relating to prudential supervision and this has given rise to a certain amount of prudence of local banks," he told the Island Financial Review. The financial crisis began in the US and soon spread to Europe as result of aggressive lending and securitis ation of debt. "Sri Lankan banks have traditionally relied on deposits as a source for financing the commercial bank’s balance sheet with relatively low leveraging. Similarly exposures to complex foreign assets, and structures such as collateralised debt obligations, have been insignificant. "Of course, in good times we have not had a good share of the cherry which foreign investment and commercial banks have enjoyed due to taking higher level of risk but in these bad times we are far more insulated as far as the banking industry is concerned," he said. "We have benefited from regulatory reforms even before some of our neighbours. The kind of foresight the Central Bank has which may sometimes be viewed even as an irritant during good times is what shields us from economic shocks." However, Theagarajah says the global credit crunch is definitely bound to have some impact on the country’s banking sector and its impact is already being felt. "We are beginning to feel the effects of the credit crunch on the supply and demand for dollars; there is no question about it. Sri Lankan banks may find it harder to mobilize foreign bank lines to support growth and this will impact cost of bank financing," he said. Theagarajah believes there is a positive side. "From a capital market point of view, listed banks stand to gain. When all hell breaks loose in developed markets the natural tendency of those investors and fund managers is to look at less riskier markets and better run companies to invest in. "So local listed banks can be attractive and there is strong case for these banks to increase their investor communications and seize the opportunity," he said. He said the listed local banks while being relatively small in size, were better managed and engaged in prudent lending than banks in advanced countries, whose structural weaknesses were exposed as a result of the sub-prime episode. In order to attract foreign investments and bring about long term benefits to the economy Theagarajah cautions that short term policies of over-taxation of the banking sector has to be relooked. About 60 percent of the profits are taxed and after further regulatory requirement of retaining reserves for capital adequacy are created it leaves little to pay out a decent return to shareholders. "The policymakers should not sacrifice long term opportunity for short term necessity. The banking sector can be positioned as a gateway to attract Foreign Investment into Sri Lanka through the capital market. The sector is somewhat the darling of the stock market and represents a better regulated industry, well run and managed. "This is where reconciliation has to take place between seeking short term revenue collection against long term opportunities," Theagarajah said. He expects the global economy to slowdown further in 2009 and 2010 which will impact on opportunities for Sri Lanka’s banking and corporate sectors. "However, we are looking optimistically at the revival of the East and a permanent solution in the North as they will create opportunities for domestic development. We will look to the future optimism and proceed with a degree of caution." Commenting on the Central Bank’s decision to cut the statutory reserve requirement (SRR) last week, he said that it was a welcome move by the regulator. "We already see the impact with the reduction of overnight interbank rates coming down to the 14 to15 percent range from the 19 to 20 percent range. It is hoped this will cascade into a reduction of medium term rates as well. "The reverse repo window can now be accessed ten times a month and this gives banks a bit more breathing space they need. It will reduce volatility in the interbank market and stabilize rates," Theagarajah said. With interest rates expected to decline this could pose a problem for those who applied for housing loans in the recent past because rates are fixed in most cases. High inflation in Sri Lanka has been around but the phenomenon in world commodity prices over the last 12 months have accentuated the problem and the result has been a downside on consumption. "Inflation together with high interest rates puts pressure on corporate margins. The positive sign was the significant reduction in price of oil which has dropped to the $ 70’s level against the $ 140 + levels prevailing during the first half of this year. "This will hopefully reduce the Lankan import bill and have a positive impact on trade deficit," Theagarajah said. He said that loan repayments have been affected and many banks are now focused on consolidating and monitoring their loan books while recovering loans, leaving credit expansion for better days to come. |
