Credit Positive

May 23, 2014 (LBO) – A credit guarantee scheme announced by Sri Lanka for banks lending against gold is positive for banks which have been hit by defaults, Moody’s, a rating agency said. Moody’s said underwriting standards fell in Sri Lanka after 2009 and banks were advancing as much as 80 to 95 percent of loan-to-values against gold and were exposed once prices fell.

Sri Lanka commercial bank gold backed loans Moody's Lanka Business Online

State-run banks were among the biggest lenders. The credit is used by small and medium enterprises.

Moody’s said banks reduced the LTV ratio to 65 percent and raised interest rates to around 18.7 percent from 17.5 percent when lending rates were falling to discourage gold backed loans.

The pawning loans stock had fallen 17 percent over 2013.

The Central Bank announced a credit guarantee scheme that may see about 15 percent of cover for loan to value ratios.

“Although the government’s details on the mechanism are scant at this stage, we estimate that a partial guarantee is more likely because of the government’s constrained fisca