After Cyclone Ditwah, banks and financial institutions face default risks as affected borrowers struggle to repay loans for homes, vehicles, and machinery.
According to an Impact Analysis published by Asia Securities, “Widespread economic disruption is likely to exert upward pressure on Stage 3 ratios across the banking sector.”
Nations Trust, HNB, Commercial, Sampath, NDB, Pan Asia, DFCC, Seylan, Amana, and the Union Bank of Colombo were analysed.
The Stage 3 ratio is the amount of credit-impaired loans, where a borrower has defaulted or shows signs of being unable to repay, as a percentage of total loans. Nations Trust reports the lowest Stage 3 ratio at 1%. This means 1% of loans are at risk of being paid. Union Bank of Colombo reports the highest at 8.9%. Stage 3 ratios average at 3.1% across the 10 banks.
“The monetary authority is anticipated to roll out concessionary settlement schemes, said the report. “As a result, we expect the reported Stage 3 ratios to increase at a slower pace.”
The analysed banks show a moderate ability to absorb shocks. As their coverage ratios stand at 62% on average, this means they can cover over half of the loans they expect to go unpaid.
The capital buffer among banks is also quite strong. On average, the 10 banks have a cushion — for every Rs100 they lend, they keep Rs5 set aside as a safety buffer. However, the report suggests an overall negative impact on banks.
Non-banking financial institutions will also be negatively impacted. Asia Securities reports, “A portion of the vehicle, property-backed, and machinery leasing portfolios and SME facilities are likely to turn nonperforming in the affected districts.”
Storm damage and lost wages will make repayment difficult, as households prioritise rebuilding, food, safety, and medical costs over instalments.
Before the cyclone, most finance companies had healthy non-performing loan ratios, but new defaults will push these higher over the coming quarters.
The report states that by 2nd December, the Central Bank had not reported a pause on loan repayments. During previous crises, borrowers were given a pause on their loan repayments. Selective relief may be provided with enough political pressure, but this would only defer credit costs for later.
Although the near future looks challenging for financial institutions, as rebuilding work starts and insurance money reaches families, people should slowly begin borrowing again.