Banking Sector robust with capital

Bigger scope for lending:

Sanjeevi Jayasuriya

The country’s banking sector is keeping up with its growth momentum and record impressive performance which it was able to pick up in 2010. The annual lending growth has accelerated from zero to 22 percent in the backdrop of a low interest regime. Reductions in interest rates and improving economic conditions have created an environment conducive to borrowing and investment, “three”, the Heraymila Securities Limited quarterly issue said.

Banks continue to hold significant excess capital and this creates scope for further significant lending growth, it said. The credit to deposit ratio is currently around 73 percent compared to pre-GFC level of around 80 percent suggesting at least another 9 percent upside to near term lending.

The budget reduced the VAT on banks from 20 percent to 12 percent and also the corporate tax rate from 35 percent to 28 percent. This will make Sri Lankan banks more comparable to regional peers. Improved profitability will boost the bottom line, dividends and expansion plans.

Sri Lanka phasing in more stringent capital adequacy criteria from 2013 and this will augur well for the banking industry, the report said. The recent amendments to the Banking Act may facilitate industry consolidation, particularly among smaller banks. This may be a catalyst to bank share prices.

The Central Bank has also introduced a Rs 200,000 deposit insurance scheme to protect small depositors. This should increase depositor confidence, particularly for smaller private banks which are perceived as higher risk than larger state banks.

The outlook for the banking sector is positive and the industry will be able to sustain the growth prospects despite reduction in deposit income for customers, the report said.