Sri Lanka’s Worsening Credit Quality in the Household Sector Raises Concerns

Sri Lanka’s household sector credit quality continued to decline during the first half of last year signaling a plausible build-up of imbalances in the sector.

The NPL ratio of the household sector has been rising since 2018 signifying a worsening of credit quality.

The NPL ratio of the household sector rose to 20.2 percent by the end of 2020Q2 compared to 12.5 percent in 2019Q2 despite the moratorium granting relief measures for those affected by the COVID-19 pandemic, the Central Bank data indicated.

The Bank cautioned on a high possibility of NPL levels rising significantly by the end of the moratorium period.

Despite the banking sector is the main source of household sector debt, the non-performing loans (NPLs) were largely stemming from the non-bank financial institutions (NBFI) sector.

The NBFI sector accounted for 64.3 percent of total non-performing advances of the household sector at the period ended in June 2020.

Out of the total loans of the formal financial sector which were classified as nonperforming by end 2020Q2, 60.1 percent were in buckets of 90-180 days in arrears and 180-360 days in arrears.

Further, it was cautioned that a downgrade of the loans in these buckets in the future may lead to further stress to the financial system with provisioning requirements by financial institutions increasing significantly.

A significant portion or 31.3 percent of NPLs were in arrears for more than 540 days.

The North Central, Central, and Western provinces reported the highest household sector NPL ratios of 22.0 percent, 21.2 percent, and 20.7 percent by the end of 2020Q2, respectively.

The Western province accounted for 50.8 percent of the loans and advances granted to the household sector and recorded 20.7 percent of NPLs.

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