SME credit support immaterial to Sri Lankan banks' credit profiles

Improved liquidity due to slow loan growth last year should cushion the effects.

The Central Bank of Sri Lanka’s plan to give special credit support to small and medium enterprises (SMEs) should not have a material effect on the banks’ credit profiles, reports Fitch Ratings.

Whilst the scheme will only prolong the resolution of non-performing loans (NPLs) until the end of the year, improved liquidity due to last year’s slow loan growth should cushion the effects. Implication on stocks are likely limited due to the amount of restructuring that has already taken place, Fitch added.

“Restructured loans increased to 3.6% of gross loans across Fitch-rated Sri Lankan banks at the end of September 2019 from 1.8% at end-2018,” the note said.

However, borrowers may still encounter difficulties repaying obligations unless the Sri Lankan macroeconomic environment picks up by the end-2020, when the plan ends. Pressure will ease as GDP growth is expected to rise to 3.5% this year from 2.8% in 2019.

Launched this month, the scheme hopes to spur economic growth through the banking sector, including a lending cap, and to cease recoveries on SME loans in the manufacturing, services, agriculture or construction sectors, with annual turnover of $88,180 (LKR16m) to $4.1m (LKR750m) in 2019 and total outstanding loans of up to $1.65m (LKR300m) at the end-2019. Banks must apply for this by 31 March.

Also read: Sri Lankan banks' bearish outlook to extend until end-2019