Sri Lanka’s Banks are now facing headwinds in returning to normalcy levels following the third wave Covid -19 impact which cannot be over come any out of the box thinking or efforts, banking sector experts warned.
They noted that they expect this unpredictable trend triggered by short sighted policies to continue in to 2021 at a deadly but much slower pace making it difficult to forecast repercussions,. . .
Deteriorating asset quality and the associated higher credit costs are expected to keep banks’ profitability lower in 2021 than pre-2019 levels, despite improvement from 2020 profitability, intentional financial agencies claimed
These agencies predicted that slow economic activity, external and domestic vulnerabilities, subdued private credit growth and the sovereign’s weakened credit profile to inflict significant downside risks to the operating environment of Sri Lankan banks.
Local banks’ impaired loan ratios have been rising despite the spate of relief measures announced by the Central Bank for borrowers as well as banks in terms of bad loan recognition, it said. \
The third wave COVID-19 ak has adversely impacted the income and earning capacity of borrowers affecting their ability to service their debt obligations to banks.
Further, the creditworthiness of certain borrowers may deteriorate in the long term, and accordingly, the credit quality of the banking sector will depend on the nature and pace of economic recovery.
Therefore, it is difficult for banks to fully assess the impact of the COVID-19 outbreak on loan classification, expected credit losses, provisioning, credit risk weightings, and capital, several CFOs of leading commercial banks said.
The government and regulatory authorities have mandated, encouraged, or granted payment holidays and debt moratoria to borrowers under which repayments of interest and principal are delayed creating a potential adverse impact on the cash flows and liquidity positions of banks.
Therefore, reduced revenue flows and higher potential losses may adversely affect profitability and reduce capital ratios of banks. Consumers switching to digital banking platforms and services could also become victims of financial crime or misconduct as deceptive parties may identify opportunities for fraud, scams or other unlawful activities which may pose legal risks to banks.
Many institutions including banks have moved to flexible working arrangements in the ‘new normal’, such as working from home and other remote working arrangements, duty shifts, flexible hours, etc.
However, work from home arrangements may also have an adverse impact on operational activities of banks in terms of IT and data security, internal and external fraud, cyber-attacks, internal network capacity, and control mechanisms such as anti-money laundering (AML) and know-your customer (KYC) requirements, they pointed out