Regulatory Forbearance

April 06, 2009 (LBO) – The Sri Lankan government is considering relaxing criteria for bad loan provisioning to help the corporate sector cope with the effects an economic downturn, a senior finance ministry official said.

Some private sector representatives from the construction sector, which has been badly affected by the slowdown, also asked at the meeting whether the government could consider a temporary moratorium on loan repayments.

Attygalle said the government was considering asking commercial banks to give some “breathing space” to the corporate sector by having loans to the manufacturing and export sector rescheduled.

It is not exactly clear how the move will help corporates as banks can foreclose on defaulted loans irrespective of loan loss recognition, analysts say.

At the moment banks have to recognize bad loans at three months. By the sixth month provisions have to be made at 20 percent and over 12 months, at 50 percent.

If provisioning rules are also delayed, banks will report higher than real profits and may also have to pay tax on the profits, analysts say.

In developed countries there are strict loan loss provisioning rules and banks are not allowed to trade without minimum c