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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka’s state banks face biggest exposure to pawning loans – Study

Sri Lanka’s state banks face biggest exposure to pawning loans – Study

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sriranga

sriranga
Co-Admin

Aug 14, 2013 (LBO) - Defaults in Sri Lanka's gold-backed loans will grow and keeping defaulters out of a credit information system increases moral hazard by not discouraging default, an international credit rating agency said.

Standard & Poor's said in a report that defaults in gold-backed loans in banks covered by the agency was rising.

Gold-backed loans grew with rising gold prices, partly due to loose policy by the Federal Reserve which debased paper money, but prices started to collapse from late 2012.

S&P said in Sri Lanka gold-loans growth was also helped by a zero risk weight on capital and absence of restrictions on loan-to-value rations.

"Moreover, regulations do not require banks to submit the credit history of pawning borrowers to the Credit Information Bureau of Sri Lanka," the rating agency said.

"This increases moral hazard, given that default does no harm to an individual's credit history."

S&P said non-performing loans in gold loans were already rising. NPLs at banks analyzed by S&P rose to 1-5 percent as of April 30, from less than 1.0 percent in December 2011.

"We expect defaults in pawning loans to increase over the next 12 months unless gold prices stabilize," said Standard & Poor's credit analyst Geeta Chugh said in a statement.

The rating agency said pawning growth will be sluggish in part because the Central Bank had advised banks to be cautions.

"In our base-case scenario, we expect earnings of Sri Lankan banks to absorb the higher credit costs associated with pawning loans without any significant deterioration in their overall capital position," said Chugh said.

"A sustained weakness in the gold prices could lead to unexpected losses. This could hurt banks' capitalization because they haven't allocated any capital buffer for risk in the pawning business."

Some banks have already started to make provisions for pawning losses. Sri Lanka's Hatton National Bank provide 1.5 billion rupees for credit losses this quarter, with around a quarter was related to gold-loans, an official said.
http://www.lankabusinessonline.com/news/sri-lanka-gold-backed-loans-defaults-to-grow:-s&p/1294217575

http://sharemarket-srilanka.blogspot.co.uk/

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics

Sri Lanka’s People’s Bank and National Savings Banks are the ones highly exposed to pawning loans in the country, reveals S&P, an international rating agency, which predicts that the reversals in recent gold prices may cause pain for local banks.

Accordingly, as of end 2012, People’s Bank’s exposure to the pawning loans out of the overall amount lent by local banks accounts for 36-pct, while the NSB follows it with a 33-pct exposure.

Sampath Bank, a public quoted entity ranks third in the exposure levels with 26-pct out of the total pawn loans offered by the local Banks, as of end 2012.

State run Bank of Ceylon, the biggest commercial Bank in the country has a 21-pct exposure level, while HNB has lent 16-pct of the pawn loans and Seylan Bank follows it with 14-pct.

Commercial Bank has the lease exposure with just 3-pct.

According to the Standard and Poor’s, the local Banks pawn loans has grown at a steep average annual rate of about 50-pct over the past three years.

This is compared to an average annual loan growth of 25-pct experienced by the banking industry.

“Pawning loans constitute 14.4% of the total loan book of Sri Lanka’s banks as of March 31, 2013. This is the largest sectoral exposure for Sri Lankan banks”, announced S&P.

“We expect defaults in pawning loans to increase over the next 12 months unless clear signs of gold prices stabilizing
emerge”.

However, the rating firm says, the banks’ overall earnings will likely to offer sufficient cushion against higher credit costs in the pawning segment.

*Loan Percentage is calculated based on the pawning loans as a percentage of net loans and advances to customers.
http://www.news360.lk/economy/news-sri-lanka-gold-15-08-2013-market-29094

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