Standard and Poor assesses SL as ‘high risk country’
CB states S&P’s views are baseless
CREDIT RISK FACTORS
S&P views the credit risk in Sri Lanka as taking into account moderate private sector debt in the context of low income levels, relaxed lending practices and underwriting standards, as well as a weak payment culture, and rule of law. The use of cash flow analysis for underwriting is limited and some exposures are concentrated. Moreover, risk management practices are evolving.
By Sulochana Ramiah Mohan
Standard & Poor’s (S&P), one of the world’s traditionaly known and to that extent reputed providers of credit ratings has slotted Sri Lanka ‘as a very high risk country.’
S&P assigned Sri Lanka to its Banking Industry Country Risk Assessment (BICRA) an economic risk score of ‘8’ and an industry risk score of ‘7’ which are ‘very high risks.’ However, the Central Bank (CB) in its response stated: ‘The S&P’s statement is factually incorrect, illogically analyzed, and is highly contradictory. The banking system is sound and resilient and is not prone to high risk as indicated in the statement of S&P.’
The S&P release stated that the economic risk score of ‘8’ for Sri Lanka reflects a “very high risk” assessment of economic resilience and credit risk in the economy – and a “high risk” assessment of economic imbalances, as per their defined criteria.
According to S&P, a bank operating within a particular country and in the banking industry faces risks relative to those in ‘other banking industries.’ They range from group ‘1’ (the lowest risk) to group ‘10’ (the highest risk). Other notable countries in the BICRA group ‘8’ are Nigeria, Tunisia and Kazakhstan.
Their assessment of economic imbalance factors is based on the recent pickup in growth of private sector credit.
It stated that the CB’s recent directive to apply a ceiling to the credit growth of banks should help to partially curb this risk. Nevertheless, in their view, Sri Lanka’s economic imbalances could increase if credit growth continues at the current pace.
‘Nevertheless,’ the statement read, ‘Sri Lanka’s economic growth prospects have improved following the end of the civil war and subsequent shift in the government’s focus toward boosting the economy and diversifying sources of growth.’
However, the CB stated that the banking system is sound and S&P’s views were illogical. The communique‚ read: ‘The Sri Lankan banking system is sound and resilient with the performance of the banking industry improving over the past few years. The key financial soundness indicators of the banking sector which accounts for 55% of financial system assets were maintained at healthy levels.’ The CB said the key financial indicators display a conspicuous improvement in the gross non performing advances ratio (NPA) from 5.2% in 2007 to 3.8% in 2011 – with absolute volumes of NPA indicating only a relatively lower growth of 25% in comparison to the overall credit growth of 69%, during this period.{jcomments on}
