Net Interest Margin expected to decline

Indunil Hewage

The banking industry which accounts for 75 % of GDP in Sri Lanka experiences increased pressure on Net Interest Margin (NIM) and industry authorities emphasize the need to arrest the situation by introducing flexible and novel banking solutions particularly leasing and venture capital, fee-based banking, merchant and investment banking.

The stiff competition in the industry has resulted in declining NIM and according to Central Bank predictions; NIM is further expected to decline to around 3.3 % in 2016 from the current level of 4.2 %. Improving risk management abilities, asset quality, implementing changes in accounting standards in line with IFRS and managing the impact of global market instability are the other key issues faced by the banking industry.

However, local banking industry has registered a substantial growth despite the declining of NIM and it is forecast that financial service industry will grow by 8.2 % in 2012 due to economic activities in the country. Banks need to expand services, delivery channels and products portfolio to meet the needs of the local customers while focusing more on cost efficiency and resource utilization, senior industry official said.

According to Central Bank sources, assets of the industry have increased four-fold in the past decade. Lending segment is forecast to reach 5 trillion from the current level of around Rs. 2.5 trillion and assets of the banking sector will also double to Rs. 8 trillion by 2016. It is predicted that worker remittances will increase to Rs. 6.5 billion, domestic savings ratio to 22 % and 100 % financial inclusion by 2016.