Default Hit

June 29, 2006 (LBO) – Small Sri Lankan banks are facing the threat of weaker credit ratings, following a government move to lift a law that allows banks to speed-up foreclosure on assets pledged against smaller loans. But state banks are excluded from the project. Bankers have already warned that the move to stop parate execution – a provision which allows banks to sell collateral on a defaulting loan by board resolution – on loans below five million rupees, will discourage banks from lending to the small and medium sector.

Trade chambers have also voiced fears that banks may shun smaller borrowers as a result of the new law.

No incentive

“The proposed law severely alters the business model of some banks and risks associated with small loans,” says Chanaka Wickramasuriya, Country Head of Fitch Ratings in Colombo.

“Certainly, this will not encourage banks to lend to small businesses.”

The hardest hit banks are expected to be housing banks, such as the State Mortgage and Investment Bank and HDFC – another state-owned bank which is now listed in the Colombo Stock Exchange, which have large numbers of small loans.

Both banks now have investment grade, A (lka) ratings.