Bank's Association concerned over general provision of 1 per cent on all advances

CONCERN: The following representation has been made by the Sri Lanka Banks' Association (Garantee) Ltd, to the Governor, Central Bank in regard to the direction issued by the Central Bank of Sri Lanka (CBSL) that Banks will be required to maintain a General Provision equivalent to 1% of all performing and non performing advances.

Whilst certain banks accept in principle the requirement to maintain a general provision of 1% of total performing and non-performing advances, reservations are expressed regarding the timing and across-the-board applicability.

Since the proposal will have an impact on the general cost of funds, a suggestion has been made to limit its applicability to asset categories where CBSL wishes to curtail credit expansion.

The average NPL ratio of the Banking Sector is around 15% of total advances. Proposed 1% provision signifies an immediate reduction of profitability by 1% of the performing advances of 85%.

Furthermore, Banks will be compelled to increase the lending rates to all customers, which means even the 85% of the good customers will have to bear the burden on account of non-performing customers. This is unfair on the part of the performing customers.

Even when a facility is granted to a AAA customer, immediate provision of 1% will be required. This proposal goes in opposite direction to the BASEL Accord to be implemented in 2008.

Lending to borrowers with good ratings are encouraged by the lesser capital charge applied on them. A capital charge of 20% is imposed, instead of the current 110% charged on AAA borrowers.

It is also observed that the general provision of 1% is disallowed for tax unlike specific provisions. Profitability of banks with good credit quality will be reduced due to no fault of theirs.

This proposal does not tend to encourage good borrowers and good credit quality in the Banking Sector.