IMF Publishes Reports on 2018 Article IV Consultation with Sri Lanka
IMF published its staff report and selected issues report under the 2018 Article IV consultation with Sri Lanka. Directors welcomed efforts to further strengthen the resilience of the financial sector, including with Basel III implementation. They noted that macro-prudential tools could be used to rein in excessive credit growth in the real estate sector and encouraged the authorities to address identified weaknesses in non-bank financial institutions (NBFIs).
The staff report highlights that the authorities viewed the financial system as well-capitalized and stable. Financial soundness indicators are generally sound for the banking sector, although weaknesses remain in non-banks. Banks account for two-third of total financial sector assets. Despite rapid credit growth, the capital adequacy ratio (CAR) of banks stabilized at 15.2% in 2017, with non-performing loan (NPL) and provision coverage ratios improving to 2.5% and 70%, respectively. NBFIs—the leasing and financing companies that account for about 9% of the financial sector assets and cater to high-risk borrowers—are well-capitalized, with CAR at 13.1% by the end of 2017. However, 10 NBFIs (out of 52 in total and not systemic in size) are either in negative equity or show other financial strains. Further macro-prudential measures can help contain excessive credit growth.
Sri Lankan banks are strengthening their capital positions under Basel III migration. The migration timeframe imposes a minimum CAR of 14% for six systemic banks and 12.5% for others by January 2019. Although the banking sector appears well-prepared to meet the requirements, risks remain that an adverse shock could weaken asset quality and compel banks to raise additional capital. Staff recommended preparing contingency plans, including through consolidation of banks that may not meet the requirement to raise additional capital. A Financial System Stability Review is planned for the financial year 2019. Staff welcomed steps to strengthen NBFI supervision. The Central Bank of Sri Lanka's (CBSL) six-fold increase in the end-2020 minimum equity capital requirement for NBFIs is expected to strengthen capital positions, while promoting consolidation of small institutions. The authorities are committed to swiftly implement the recommended action plan of Financial Action Task Force to address weaknesses in the anti-money laundering and combating the financing of terrorism (AML/CFT) regime.
The selected issues report reveals that stress tests do not point to systemic risks. An illustrative stress test of banking system shows that the system would be able to withstand an adverse shock to the housing and construction sectors. Risks from rapid credit growth in Sri Lanka are further complicated by the growing importance of NBFIs. The aggregate financial soundness indicators of NBFIs do not point to vulnerabilities and this sector is too small to constitute a systemic risk. Nevertheless, NBFI’s regulation and supervision need to be strengthened as the riskiness and importance of these companies increases. Banks are implementing Sri Lanka’s Basel III requirements, with all banks scheduled to abide by the criteria set by CBSL by January 01, 2019, strengthening the banking sector by increasing capital buffers and requiring consolidation of banks that do not meet the thresholds. Additionally, Sri Lanka will benefit from ongoing efforts to strengthen supervision, macro-prudential framework, and the crisis management and resolution frameworks.
Related Links
Keywords: Asia Pacific, Sri Lanka, Banking, Basel III, Macro-prudential Framework, NPLs, CAR, Stress Testing, Article IV, IMF
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Previous Article
HKMA Finalizes Implementation of BDAR 2018 and Amendment Notice 2018Related Articles
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
BIS Bulletin Examines Cognitive Limits of Large Language Models
The use cases of generative AI in the banking sector are evolving fast, with many institutions adopting the technology to enhance customer service and operational efficiency.
ECB is Conducting First Cyber Risk Stress Test for Banks
As part of the increasing regulatory focus on operational resilience, cyber risk stress testing is also becoming a crucial aspect of ensuring bank resilience in the face of cyber threats.
EBA Continues Momentum Toward Strengthening Prudential Rules for Banks
A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations.
EU and UK Agencies Issue Updates on Final Basel III Rules
The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards