Banks await Central Bank response to ‘interest relief’

By Madhusha Thavapalakumar

Sri Lanka’s banking industry is waiting with bated breath for the Central Bank of Sri Lanka (CBSL) to respond to its request to be allowed to charge interest from lenders under the Covid-19 moratorium, The Sunday Morning Business learns.

The industry made a request from the CBSL a couple of weeks ago, to be allowed to charge at least a component of the interest on loans that were completely waived off under the moratorium.

This request was made to ensure banks have sufficient cash flow to pay interest income to their depositors, as the moratorium as it stands deprives banks of interest income for half a year, creating severe cash flow issues.

Well-placed banking sector sources told us that negotiations are underway with the CBSL and that it is hoped a response would be received within the week.

Following the local spread of Covid-19, the CBSL announced financial relief in late March for selected industries due to the financial struggles endured as a result of the islandwide curfew as a result of Covid-19.

Issuing a circular on 24 March, a few days after the imposition of the islandwide curfew, the CBSL announced a six-month debt moratorium for affected industries comprising that of small and medium enterprises (SME), tourism, apparel, plantation, IT, and related logistics service providers.

In the same circular, the CBSL instructed financial institutions to provide working capital requirements at an interest rate of 4% and waive off interest payments for at least six months for the aforementioned sectors.

According to JB Securities estimates, around 30% of loans to the private sector from the banking sector will be under moratorium. Based on the current weighted average lending rate of 13%, the day one loss on the carrying value of these loans, assuming an average moratorium period of 4.5 months, will be Rs. 94 billion. This goes up to Rs. 125 billion if the average period increases to six months. 

They have also estimated that Rs. 50 billion of this loss can be offset from the reduction in the tax burden from 52% to 40%, due to the recent tax cuts computed on last year’s post-tax profits; the balance will have to be borne by a combination of labour cost savings (cuts to bonuses), other cost savings, higher margins, and lower profits.

A week after the announcement of the moratorium, the CBSL announced a Rs. 50 billion refinancing facility to financial institutions, to implement the debt moratorium on capital and interest and a working capital loan for Covid-19-hit businesses and individuals.

Licensed commercial banks (LCBs), licensed specialised banks (LSBs), licensed finance companies (LFCs), and specialised leasing companies were made eligible to participate in this refinancing facility which commenced in late March.

In addition to this moratorium, banks are instructed to provide two other debt moratoriums under the circular issued in March, along with a number of relief measures for sectors affected by Covid-19, all of which involve assistance from financial institutions.

Financial institutions were instructed to implement a debt moratorium on capital and interest which includes a six-month moratorium on leasing rentals of all three-wheelers, school vans, lorries, small good transport vehicles, and buses operated by the self-employed, and a moratorium until 30 May on personal loans and lease rentals valued at less than Rs. 1 million.

Around 3% of private sector credit is outstanding to the tourism sector as at the end of 2019, totalling Rs. 240 billion. Of this amount, Rs. 100 billion is under a one-year moratorium. In January this year, the CBSL announced a credit support scheme for SMEs.