S&P assessment on Sri Lanka: Economy, banking system at ¿very high¿ risk

Colombo (The Island/ANN) - Standard & Poor¿s Ratings Services yesterday assigned Sri Lanka to its Banking Industry Country Risk Assessment (BICRA) group ¿8¿. At the same time, it assigned an economic risk score of ¿8¿ and an industry risk score of ¿7¿.

"We have reviewed the banking sector of Sri Lanka (Democratic Socialist Republic of) (B+/Stable/B). The BICRA groups summarise our view of the risks that a bank operating within a particular country and banking industry faces relative to those in other banking industries. They range from group ¿1¿ (the lowest risk) to group ¿10¿ (the highest risk). Other notable countries in BICRA group ¿8¿ are Nigeria, Tunisia, and Kazakhstan," the ratings agency said.

"Our economic risk score of ¿8¿ for Sri Lanka reflects a "very high risk" assessment of economic resilience and credit risk in the economy, and a "high risk" assessment of economic imbalances, as our criteria define those terms," S&P said.

"Our assessment of economic resilience reflects Sri Lanka¿s status as a low-income economy, as measured in terms of its per capita GDP, and the inefficiencies in the economy. Nevertheless, Sri Lanka¿s economic growth prospects have improved following the end of the civil war and subsequent shift in the government¿s focus toward boosting the economy and diversifying sources of growth.

"Our assessment of economic imbalance factors in the recent pickup in growth of private sector credit. The central bank¿s recent directive to apply a ceiling to the credit growth of banks should help to partially curb this risk. Nevertheless, in our view, Sri Lanka¿s economic imbalances could increase if credit growth continues at the current pace. Sri Lanka¿s external position, which we consider to be moderately vulnerable, also affects the country¿s economic imbalance. Our assessment of Sri Lanka¿s external position reflects the country¿s weak external liquidity, and moderately high and increasing external debt.

"Our view of credit risk in Sri Lanka takes into account moderate private sector debt in the context of low income levels, relaxed lending practices and underwriting standards, as well as a weak payment culture and rule of law. The use of cash flow analysis for underwriting is limited in Sri Lanka, and some exposures are concentrated. Moreover, risk management practices are evolving, in our view.

"Our industry risk score of ¿7¿ for Sri Lanka is based on our opinion that the country faces "very high risk" in its institutional framework, "high risk" in its competitive dynamics, and "intermediate risk" in its system-wide funding.

"We view the banking regulations in Sri Lanka as somewhat weaker than international standards. Governance and transparency of banks are weak by global standards. Sri Lanka adopted a standardized approach of Basel II in 2008, with capital requirements higher than global requirements. The key regulations for banks seem sufficient. However, finance companies are less regulated, in our view. This is despite the December 2008 collapse of a finance company triggering a run on a bank in that group."

S&P further said that under the existing legislation, banks in Sri Lanka are subject to on-site examinations by the banking sector regulator at least once every two years, which is not adequate.

"We believe the frequency of on-site supervision may not be sufficient for the regulator to quickly detect risk build-ups. Moreover, we see a potential conflict of interest in the central bank¿s role. In addition to policy formulation and supervision of banks, the monetary board of the central bank also oversees Employees¿ Provident Fund investments. The fund is a large investor in Sri Lankan banking stocks"

The banking sector¿s risk appetite is "moderate," in our view. Loan growth is high. However, banks in Sri Lanka are mostly engaged in traditional lines of business and most of their earnings come from traditional fund-based businesses, S&P said.

"Sri Lanka¿s large number of banks relative to the small economy has not led to any significant instability in the competitive environment. However, the following factors have led to market distortions: (1) a significant market share (about 50 per cent) of government-owned banks in the sector; (2) directed lending requirements toward the agriculture sector; and (3) differential use of administrative controls; e.g. a recent cap on loan growth is applicable only to banks.

"Sri Lanka¿s large proportion of highly stable core customer deposits support system-wide funding. Such deposits reduce banks¿ dependence on external debt. Nevertheless, we believe access to alternative domestic funding sources is limited because the domestic debt capital market is narrow and shallow.

"In our view, the Sri Lankan government has a "supportive" tendency towards private sector banks. We believe that the government is committed to maintaining financial system stability and market confidence. The government has a record of supporting banks during periods of financial stress by encouraging market-led solutions. For instance, in the case of Ceylinco Group, the banking sector regulator stepped in and dissolved the board of directors of group entity, Seylan Bank PLC, and supported the sale of Seylan Merchant Leasing PLC," S&P said.

Loading...

Editor’s note:Yahoo Philippines encourages responsible comments that add dimension to the discussion. No bashing or hate speech, please. You can express your opinion without slamming others or making derogatory remarks.

  • China ignores global outcry vs reclamation
    China ignores global outcry vs reclamation

    On Wednesday, G-7 foreign ministers issued a Declaration on Maritime Security expressing alarm over “unilateral actions, such as large scale land reclamation, which change the status quo and increase tensions” in the region. In their communiqué, which did not specifically mention China, the ministers expressed belief that reclamation activities were meant to “change the status quo” in the West Philippine Sea and South China Sea, through which 40 percent of global trade passes. …

  • Project NOAH exec receives recognition
    Project NOAH exec receives recognition

    Project NOAH executive director and University of the Philippines professor Mahar Lagmay recently received recognition from the European Geosciences Union (EGU) for his work in disaster risk reduction and mitigation in the Philippines. …

  • Nightclub ban for US troops
    Nightclub ban for US troops

    The US Pacific Command has banned its troops in the Philippines from bars and nightclubs, a spokesman said yesterday, with the trial under way of a US Marine accused of murdering a transgender Filipino he met in a bar. Thousands of American and Filipino soldiers will kick off tomorrow the 10-day annual military exercises, according to Capt. Alex Lim, a spokesman for the US forces, but there will be strict controls on their free time. Lim would not say why the restrictions were imposed but …

  • US-Phl war games to start under China’s shadow
    US-Phl war games to start under China’s shadow

    Thousands of American and Filipino soldiers will kick off tomorrow expanded wargames, showcasing a deepening  defense alliance as alarm bells ring over China. The 10-day exercises in the Philippines are an annual affair between the longtime allies, but this time they will involve double the number of soldiers as last year in a sign of their expanding military partnership. The Philippines is seeking more US military and diplomatic support to fend off China’s increasing forcefulness in its bid …

  • Palace defends legal tack in sea row
    Palace defends legal tack in sea row

    There is nothing weak about taking the legal and diplomatic approach to push for the country’s claims in the disputed West Philippine Sea, Malacañang maintained yesterday. On Friday, Bayan Muna Rep. Neri Colmenares led a rally in front of the Chinese consulate in Makati City to protest China’s massive reclamation activities in the Spratly island group to fortify its presence in the disputed waters. Colmenares also criticized the Philippine government for supposedly not doing enough to defend …

  • Veloso sons urge authorities to save mother from death
    Veloso sons urge authorities to save mother from death

    The sons of Mary Jane Veloso, who is facing execution in Indonesia for drug smuggling, yesterday appealed to government officials to do everything to spare their mother from death. “We love you,” Mark Daniel, 12, said when asked for a message for his mother following a press conference at the University of the Philippines in Diliman, Quezon City. Mark Daniel, an incoming Grade 8 student, reiterated his appeal to those in power to help save his mother from death. His younger brother, …

  • US-Philippines wargames to start under China's shadow
    US-Philippines wargames to start under China's shadow

    Thousands of American and Filipino soldiers on Monday will kick off expanded wargames, showcasing a deepening defence alliance as alarm bells ring over China. The 10-day exercises in the Philippines are an annual affair between the longtime allies, but this time they will involve double the number of soldiers as last year in a sign of their expanding military partnership. The Philippines is seeking more US military and diplomatic support to fend off China's increasing forcefulness in its bid …

  • Bar ban for US troops in Philippines amid murder trial
    Bar ban for US troops in Philippines amid murder trial

    The US Pacific Command has banned its troops in the Philippines from bars and nightclubs, a spokesman said Saturday, with the trial under way of a US Marine accused of murdering a transgender Filipina he met in a bar. Thousands of American and Filipino soldiers will on Monday kick off 10-day annual military excercises, according to Captain Alex Lim, a spokesman for the US forces, but there will be strict controls on their free time. Lim would not say why the restrictions were imposed but …

POLL

Should Aquino be held accountable over the Mamasapano operations?

Loading...
Poll Choice Options