Banks forced to keep the lights on during COVID -19 crisis
Sri Lanka’s banking sector has been forced to provide lending facilities on concessionary terms for COVID-19 affected businesses especially SMEs following the Central Bank’s (CB) recent action of a policy rate cut and infusing more liquidity to revive the economy.
Prompted by President Gotabaya Rajapaksa’s verbal attack on the monetary authority’s top officials of failure to present any viable instrument to spur the COVID-affected economy, the CB has pumped excess liquidity as an incentive for banks to lend to businesses specially SMEs.
The CB has reduced Statutory Reserve Ratio (SRR) by 200bps from 4 to 2 per cent on June 16 to release over Rs. 115 billion of liquidity into the banking system, facilitating banks to expedite credit flows into the economy, while reducing cost of funds.
Following this initiative a sum of Rs.100 billion has been added to the existing Rs.50 billion refinance scheme injecting additional liquidity of over Rs. 250 billion to the domestic money market, financial analysts said.
This has increased the CB money stock to around Rs.500 billion from Rs.317 billion, they revealed predicting that a large portion of the excess liquidity will be parked in Government Securities.
Otherwise the CB will have to use this prospect to boost short term Treasury instruments or allow banks to keep excess cash at the CB under the standing deposit facility rate (SDFR), they said.
Financial analysts expressed their doubt on the money flow into the revival of businesses via credit schemes.
W.A. Wijewardena, a former Central Bank Deputy Governor, questioned as to whether the monetary authority has misread the issue as the lack of liquidity, as it introduced a refinance facility of Rs. 150 billion.
“Credit flows (have been) constrained by structural issues such as fear of default which had to be tackled by a comprehensive credit guarantee scheme and smoothing out banks’ internal credit approval systems,” he added.
He pointed out that the CB would have to reduce all interest rates as banks will park excess liquidity amounting to at least Rs. 375 billion under its standard deposit facility at 5.5 per cent.
Another economist noted that the CB’s move to boost liquidity when there was no liquidity crunch in the system was questionable.
He asked as to whether the monetary authority misread the real issues the economy is facing.
On the other hand the banks were too slow in reducing lending rates and processing financial facility disbursement among thousands of aggrieved applicants due to procedural delays.
The interest rate cut has brought some misery for depositors who have kept their savings in bank deposits to earn a reasonable income for their living.
The savings and fixed deposit interest rate has declined to 4 per cent and 8-9 per cent respectively while the interest rate of senior citizens deposits are fixed at 5 per cent per annum.
This has made it difficult for banks to mobilise deposits in competition with other financial institutions and among themselves while pushing depositors especially senior citizens into difficulty as they have lost their interest income enjoyed earlier.
Commercial banks have incorporated a clause in their loan application form issued to clients indicating that the working capital loan will be disbursed subject to the condition that the CB approves the specific request.
It is not available to any person merely on request. This was a stumbling block for SMEs and businessmen, several entrepreneurs said.
General Secretary of the Ceylon Bank Employees Union (CBEU) Ranjan Senanayake told the Business Times that this procedure should be changed to expedite the disbursement of loans.
Licensed Commercial Banks should be given the authority without the intervention of the CB to approve loans under the re-finance scheme, he added.
The impact of COVID-19 is expected to reduce bank interest and non interest income both due to the moratoriums offered, deferred debt repayment plans, reduced asset quality, and slow credit growth in the next 12 months, a top official of a financial advisory service disclosed.
This downturn will be followed by reduced profitability of banks on the back of lackluster economic and private sector credit growth.
Furthermore, the rate cuts and imposition of interest rate caps are likely to suppress the sector’s Net Interest Margins (NIMs) and spreads in the short term.
Banks’ profitability will be under pressure coupled with the risk of non performing loans (NPLs), a low interest rate environment and loss of fees, he added.