Side Effects

Jan 28, 2012 (LBO) – Liquid assets in Sri Lankan banks are falling and loan to deposit ratios are deteriorating, with some banks reaching 100 percent, Fitch Ratings Lanka said as authorities continued to defend a dollar peg creating a liquidity crunch. Fitch said in an report on the outlook on Sri Lankan banks that loan to deposit ratios of some banks with “less mature deposit franchises” are approaching 100 percent.

Loan to deposit ratios have risen from about 77 percent by end-2010 to 80 percent by June 2011. By September loan to deposit ratios of banks tracked by Fitch had risen to 90 percent.

Sri Lanka’s Central Bank started to defend a dollar peg actively from around July by selling foreign exchange to banks in return for rupees as credit growth picked up and put pressure on a dollar soft peg.

The foreign exchange interventions caused liquidity shortages, forcing rates up, even though there has been no formal raising of policy rates.

Fitch said deposit rates have risen and bank net interest margins were shrinking.

To prevent rates rising further, the Central Bank offset or ‘sterilized’ interventions in the forex market by purchasing Treasury bills including from banks and injecting liquidity (printing money) in to