Moody’s says guarantee on pawning loans is credit positive for banks
Monday, 26 May 2014 10:29
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Moody’s Investors Service has said that the guarantee on pawning loans proposed by the Central Bank of Sri Lanka will support the weak quality of pawning loans of banks, which constitute a substantial part of the recent increase in banks’ nonperforming loans.
Last Tuesday, the Central Bank of Sri Lanka announced that it will implement a credit guarantee scheme on so-called pawning loans of licensed banks, which in Sri Lanka are typically backed by gold. The guarantee will be implemented by the Central Bank of behalf of the Government of Sri Lanka.
“Although the Government’s details on the mechanism are scant at this stage, we estimate that a partial guarantee is more likely because of the Government’s constrained fiscal capacity and the history of government guarantees,” said Nick Caes, a Moody’s Associate Analyst.
“Still, even a partial guarantee would be credit positive for Sri Lanka’s banks because it will support the currently weak quality of their pawning loans, which constituted a substantial part of the recent increase in banks’ nonperforming loans,” Caes added.
Caes was speaking on the release of a new sector comment, entitled ‘Sri Lanka Guarantee on Pawning Loans Is Credit Positive for Banks’.
Pawning loans are typically short-term loans extended by banks to retail and small and midsize enterprise (SME) borrowers, using gold as the underlying collateral and only recourse. Traditionally, pawning loans have been used to fund SMEs in the agriculture and trade sectors. Although the new guarantee scheme will focus only on new pawning loans, Moody’s expects that the scheme will allow existing borrowers to refinance their pawning loans, perhaps even at a lower rate, leading to improvements in the quality of the asset class for the banks.
