June 22, 2012 (LBO) – Sri Lanka’s banking system is sound and well capitalized officials said, though bad loans have started to pick up slightly as a developing credit bubble was rudely jerked to a halt by the island’s dollar peg. Data published by the Central Bank show that bad loans which peaked at 8.5 percent during a balance of payments crisis in 2009 which also involved a property bubble eased to 5.4 percent in 2010, and 3.8 percent by end 2011.
Sound and Solid
By in the March quarter bad loans have picked up slightly to 3.9 percent during the latest balance of payments crisis where the rupee fell from 110 to 132 rupees and interest rates picked up by around 500 basis points.
“Our view at this point in time is that the banking system remains very sound and very solid,” IMF mission chief John Nelmes told reporters last week.
“It is well capitalized and the liquidity position of banks is also very positive. So it is entirely natural that one would see an increase in non-performing loans particularly when we saw very large in the stock of credit outstanding in the last two years.”
“But I would emphasize that today it is a very small increase and overall, the system is very sound.”