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SLBA Response to Recent Report by S&P on Sri Lanka Banking Sector

In the last two years with peace being ushered in, understandably industry credit growth has been significant at 23.7% and 31.3% in 2010 and 2011 respectively reflecting the banks' role of supporting the industry – agriculture, tourism, construction, infrastructure, transport, food and beverages across different business segments from small business enterprises to large Corporates across the country.

A Committee consisting of experts in Capital Adequacy measures were appointed to this committee to study in detail the requirements for compliance with Basel 2 regulations (provide link to article on the subject under ‘Legal & Regulatory Matters’) and make recommendation to Banks after consultation with Central Bank of Sri Lanka.

The banking sector plays a pivotal and responsible role in channelling public deposits to investment and consumption lending that ultimately assists in improving standard of living and quality of life of the citizens of this country. It should be a source of significant comfort that despite the levels of credit growth recorded, asset quality has improved significantly reflected in gross nonperforming assets level improving to 3.8% in 2011.

Several banks were successful in raising dollar funds from international capital markets at very attractive interest rates which is a sound reflection of international investors' perceptions. Whilst it is fair to say that majority of bank lending is backed by collateral, this in no way reflects the credit standards adopted by the banks in assessing the cash flow repayment ability of borrowers.

The regulator whilst emphasising the role banks need to play in stimulating economic growth has also in the same vein significantly strengthened standards and focus on corporate governance, risk management, capital adequacy requirements, transparency and disclosure. There is strong supervision to ensure banks adopt best in class practices and maintain or exceed global standards of measurements in these areas. In the context of a volatile and challenging global economy we are well aware that banking industry in Sri Lanka cannot be fully insulated from risks arising from commodity prices, reduced purchasing power from Western Economies and the contagion impacts of a global downturn.

However, banks in Sri Lanka have been tested for resilience in far more challenging times in the past and confident that adequate capacity has been built in the areas of risk management, capital and liquidity to continue to play a pivotal role in the economy in managing the future. There is no evidence to suggest that the public's confidence in the health and stability of the banks in Sri Lanka needs to be shaken.

Taken in the context of bank failures in other parts of the world, especially in the United States of America and which still appear to take place long after the financial crises, Sri Lanka's banking system is considered quite stable and robust by the international community.


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