Financial Health

Dec 20, 2007 (LBO) – Sri Lanka’s financial sector has so far been resilient in the face of shocks but risks are increasing as the economy heads for tough times, the International Monetary Fund (IMF) has warned. Rising interest rates likely to affect profitability of banks while credit quality is weakening as a result of fast loan growth, the IMF said.

Challenges

The international monetary watchdog called for improved bank supervision and more involvement in risk management by top commercial bank management.

“Although near-term risks to banking system stability appear manageable, challenges remain,” the IMF said in a new assessment of the island’s financial system stability.

It warned that recent tightening of monetary policy to combat inflation, resulting in a higher interest rate environment, is likely to adversely affect the profitability of finance companies and banks with largely fixed-rate assets.

Banks have so far managed to mitigate this by demanding increased spreads between deposit and lending rates.

But load deposit ratios had deteriorated indicating higher funding of loans off mone