Fitch estimates most Sri Lankan banks will need to raise capital to meet Basel III requirements by end 2018.
Sri Lankan banks will be moving to Basel III regulatory framework starting July 2017 and it will be fully implemented in early 2019, Jeewanthi Malagala, Analyst at CFA, said.
Capital buffers will be phased in up until January 1, 2019, she said, adding that no counter-cyclical buffer has been set.
Banks with assets more than Rs. 500 billion will be classified as D-SIBs.
Making a presentation on the Lankan banking sector, Malagala further noted that the Sri Lankan banking sector has witnessed rapid loan growth despite a contractionary monetary policy.
Loan growth in the sector has been high, exceeding banks’ internal capital generation.
“State banks’ capacity to absorb losses is also overstated as their risk weighted assets are understated due to zero risk weights on pawning and foreign currency exposure to the state.”
Noting that adjustment for stressed assets elevate the sector NPL ratio by about 1% , Malagala pointed out that the banking sector NPL growth has been masked by reduction in pawning NPLs – a trend not expected to continue.
“Challenging operating conditions exert pressure on asset quality, particularly from segments such as retail and SMEs where banks have increasingly grown. NPL ratios of large Sri Lankan banks indicate an upward trend during 1Q17.”
According to Malagala, state banks’ market share could also weaken in the medium term due to limited access to capital and substantial dividend payout.
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