Be Careful

Nov 08, 2007 (LBO) – Sri Lanka’s shaky budgets and complementary monetary policy are the biggest dangers to the banking system, an international rating agency has warned. Fitch Ratings says the ongoing internal war and even the December 2004 tsunami had little direct impact on the stability of Sri Lanka’s banking system.

“However, the state’s recent fiscal weaknesses, its resulting effect on monetary policy stability and overall policy consistency have been, and will be, the sector’s primary concerns in the short to medium term,” Fitch Ratings said, quoting from a forthcoming report.

Fitch said large fiscal deficits and poor savings rates were crowding out capital markets making the banking system the dominant component of the financial system accounting for 57.5 percent.

The eight largest banks accounted for 80.5 percent of banking assets, with the remaining 29 banks accounting for only 19.5 percent.

Although there is some rationale for consolidation within the banking system, Fitch says it has been blocked by shareholder and employee issues.

“In spite of a volatile, and recently rising, interest rate environment, the Sri Lankan banking industry