Upcoming banking regulations will pressure sector profitability, experts have warned.
Central Bank (CB) is in the process of issuing new regulations, which will lead to a stricter credit approval process, which will result in slower credit growth, an equity research report said.Amongst these regulations is requirement to raise the minimum capital to Rs 10 billion rupees an Asia Securities Research report said.Asia securities' findings also indicate that 90% of the businesses registered in Sri Lanka are SMEs recording an annual turnover below Rs 600 million.
On the back of major economic expansion in the post war environment, policy changes, and a decline in project loans, the SME sector has become a prime focus for all private banks, the report said.It however warned that CB's requirement of risk sensitive pricing, where more credit towards customers with higher credit ratings at lower rates will affect bank margins, while any reduction in securitization exposure, including credit card business, would further deteriorate margins.
The credit card business is a high profitable banking business.
"Limits on lending will exert further pressure on return on assets (ROA) & Return on equity (ROE)", it stated.
Asia securities, last Wednesday, launched their latest equity research report, under the title, "Banks: An Evolving Story of Elephants & Cheetahs."Combined with pressure on profitability because of this requirement in increased capital, this will promote consolidation or force banks to raise additional capital, the report said.
While this will be slightly dilutive in the short run, Asia research said that they believe this will further strengthen the banking system to face external financial shocks and safeguard investments.Loan growth remains challenging in the short term with increasing uncertainty in the political and economic environment due to upcoming policy changes and elections, the report said.
The slowdown in infrastructure, construction, and sub-contracting sectors would affect growth in project loans in 2015.
Courtesy: Ceylon Financial Times 17 June 2015