Loan management:

Recovery strategy vital

Hiran H. Senewiratne

All regulated registered financial institutions should adopt a strategy to recover all loans given to various business entities to maintain their moderate loan portfolio for the industry to sustain in the current business environment, RAM Rating (Lanka) Ltd said.

Due to the current economic crisis most of the business entities especially the export sector are coming under tremendous stress.

Therefore, it is necessary to adopt a strategy to recover all loans of financial institutions, Country Manager RAM Ratings (Lanka) Ltd Kingston Nq Jin Keng told Daily News Business.

Keng said that Sri Lanka is not very much affected by the global financial crisis because local financial institutions have not directly invested in toxic assets in global entities although our exports sector is little affected. Further, Sri Lankan banks including financial institutions are well capitalized, because the capital adequacy ratio for banks 10 percent which is two percent above the international level.

The international capital adequacy ration is 8 percent, Keng said.

The spate of negative publicity amid the challenging the economic environment had fuelled public panic and confidence in Registered Finance Companies (RFC) waned.

This issue mainly prompted following the collapse of unregulated financial institutions such as Golden Key Credit Card Company and Sakvithi Investment, Keng said.

However, the action taken by Central Bank to infuse market confidence by vesting the management control of troubled Ceylinco-related RFCs to Lankaputhra Development Bank and Merchant of Sri Lanka Plc has lifted depositors’ confidence to some extent.

Keng said the health of the financial institution sector’s credit portfolio is reflected in its net non-performing-loan (NPL) ratio, which had improved from 6.51 percent to 1.76 percent A between March 2002 to March 2006.

The industry’s gross Non Profit Loan ration came up to 5.66 per cent as at end March 2006, more robust earning had helped the industry to make adequate provisions.

The NET ration started rising again due to micro economic factors, reaching 5.21 percent by end of December 2008.

The industry per se has preserved its liquidity level at 15 percent above the regulatory minimum in the last three years.

RFCs are expected to maintain 15 percent of their time deposit liabilities in the form of liquid assets with 20 percent in the case of demand deposits.

In March 2009, the Central Bank relaxed liquidity requirements for the industry.

RFCs are now obliged to hold only 10 percent of their time-deposit liabilities in the form of liquid assets with a 15 per cent requirement for demand deposits.

RAM is a Malaysian based rating company operating in Sri Lanka.