The banking sector’s asset quality weakness remained stable from June to September this year. However, the industry is optimistic that the worst is behind them, as they are observing a slight decrease in non-performing loans. This positive trend is attributed to the signs of stabilization in the economy.
Based on the latest quarterly data provided by the Central Bank, the ratio of “stage 3 loans to total loans and advances” (formerly known as non-performing loans) for banks remained unchanged at 13.4 percent, the same as in the previous quarter.
Over the past four years, Sri Lanka’s banking sector has faced various challenges, including disruptions caused by the pandemic, economic crises, and potential implications from domestic debt optimization. The ratio of stage 3 loans, which was 8.4 percent at the beginning of the economic crisis in the first quarter of 2022, steadily increased to 12.9 percent a year later, reaching its peak at 13.4 percent in mid-2023.
However, there are some differences in the breakdown of stage 3 loans between licensed commercial banks and specialized banks. While commercial banks only saw a modest improvement in their asset quality, with the ratio decreasing from 13.9 percent in June to 13.7 percent in September, specialized banks experienced an increase from 9.3 percent to 10.1 percent during the same period.
Nevertheless, commercial banks have started to witness further improvement in their non-performing loans in the ongoing fourth quarter. The easing of interest rates has benefited both borrowers and lenders, enabling them to resume their activities.
Recent data on private sector credit indicate that banks have gradually and cautiously resumed lending, while borrowers have also shown some willingness to borrow as interest rates have decreased from their previous highs.
Furthermore, the commentary suggests that the language used in discussing the banking sector’s performance has become more positive.
