ECONOMYNEXT - Non-performing loans in Sri Lanka's banks rose to 3.0 percent of assets in March 2018 from 2.7 percent a year earlier, though the economy is expected to grow 4.1 percent in 2018 from 3.7 percent last year, Moody's Investors Service, a rating agency said.
"Credit growth was very high over the last two years, with the credit multiplier (credit growth/GDP growth) peaking at more than 2.5 times," Tengfu Li, a Moody's Analyst said in a statement.
"As loans disbursed over this period begin to mature, asset quality will deteriorate, and higher borrowing costs due to tighter monetary policy implemented earlier will add to the debt burden of corporates."
Sri Lanka's central bank printed money and released liquidity of over 500 billion rupees over 2015 and 2016 to drive credit to unsustainable levels and boost credit, and the economy slowed after the currency fell and rates were raised.
The rupee has continued to depreciate steadily including in 2017 when most other Asian currencies appreciated, killing real wages and domestic demand.
Moody's said higher interest rates may reduce the repayment ability of companies.
But with loan growth slowing internal capital generation would be enough to cover credit growth. Capital had also been raised to comply with Basel III standard.
The impact of higher loan loss provisions from a new accounting standard would be limited and banks capital ratios would be stable, the rating agency said.
Moody's assesses the operating environment as stable; asset risk as deteriorating; capital as stable; profitability and efficiency as stable; funding and liquidity as stable; and government support as deteriorating.
Moody's notes that capital has strengthened as the banks successfully raised capital and reduced cash dividends to comply with their Basel III requirements.
A high debt burden and contingent liabilities relating to state-owned enterprises will continue to limit the government's capacity to support the banks.