Banks barely impacted by 3rd wave relief measures: CT CLSA

While the recent financial reliefs announced by the Central Bank of Sri Lanka in the wake of disruptions caused by the third wave of the pandemic are expected to significantly boost the local business sector, it is predicted to cause a relatively insignificant negative impact on the banking sector, according to a recent report released by CT CLSA Securities (Pvt.) Ltd. 

The report provided being compensated via interest over interest as a reason for this negative impact.

The Central Bank announced a third Covid moratorium for businesses and individuals affected via a circular dated 25 May 2021, amidst a significant increase in Covid cases in the country.

The report stated that the relief measures had several proposals targeting businesses (to be granted by licensed commercial banks [LCBs] and licensed specialised banks [LSBs]), although the following proposal could be taken as the main relief measure; defer recovery of capital interest or both of borrowers who are affected on a case-by-case basis, during the period up to 31 August 2021 and on the deferred LKR loan amount, licensed banks may charge an interest on interest of 6.18% for the deferred period.

“In addition to this concession, further concessions are proposed for customers in the non-performing category at the discretion of licensed banks that includes the waive off of penal charges etc. Compared to the first loan moratorium that had a concessional rate on capital, the second and third (currently proposed) loan moratoriums are likely to be similar in nature given they charge/d interest over interest. Thus, we believe only the needed and able businesses will opt to apply for the current (proposed) moratorium,” CT CLSA added. 

The report further noted that following the announcement of the first loan moratorium during March 2020, LCBs saw an average of 35-40% of their customers taking up moratoriums, which reduced to ~10-15% during the second moratorium that expired on 31 March 2021. 

Whilst customers who were on moratoriums have fallen to around 5-7% of the overall LCB book with effect from 1 April 2021 (predominantly tourism allied moratoriums), given the similar nature of the third loan moratorium, the top management of LCBs believe a further increase of 5-7% to be accepted for moratoriums in the near term.