Capital Cushion

Sept 30, 2010 (LBO) – Sri Lanka’s Central Bank has decided to reduce the general provision on performing loans of banks to 0.5 percent by December 31, 2011 from the current one percent, governor Nivard Cabraal said. “We believe our economy does not now need provisioning as high as one percent and it will be reduced gradually over the next five quarters,” he told a news conference.

The reduction in the general loan provision would release about eight billion rupees with the total bank loans portfolio being around 1.6 trillion rupees today, he said.

Deputy Governor of the Central Bank K G D D Dheerasinghe said there were no fears the increased liquidity would fuel inflation.

“The reduction in provisioning would allow banks to increase loans and reduce lending rates,” he said.

The reduction will be phased out at a rate of 0.1 percent per quarter, over each of the five quarters commencing with the quarter ending December 31, 2010.

The one percent provision rule was introduced in November 2006 as an extra capital cushion during a period of potential financial and economic stress.

“At that time the central bank felt there was potential instability which we wanted to control. Now we feel t