Pawning biz: Banks’ Association says no cause for undue concern
Friday, 23 August 2013 02:00
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Of the total advances of banks amounting to Rs. 3.27 trillion, pawning advances constituted 17.9% or Rs. 585b
Non performing pawning loans as a percentage of total pawning advances amount to 4.2% which is lower than the overall NPL ratio of 4.7%
The Sri Lanka Banks’ Association, which represents the interests of the banking industry in Sri Lanka, yesterday issued a statement briefly commenting on certain negative statements which appeared in print media recently on pawning advances made by banks.
It said of the total advances of banks amounting to Rs. 3.27 trillion, pawning advances constituted 17.9% or Rs. 585 billion as at end-June 2013. Non performing pawning loans as a percentage of total pawning advances amounted to 4.2%, which is lower than the overall NPL ratio of 4.7% in the banking system and despite the recent drop in the price of gold, the level of loss given default is likely to be less than that experienced for many other collateral classes relating to loans given by banks.
In regard to the exposure, it must be noted that banks consider pawning as a means of providing easy and speedy access to finance to categories of borrowers, especially those involved in agriculture, fisheries and small scale trading activities, who would otherwise be denied the ability to carry on with their livelihoods. Although there is no regulator imposed loan to value ceiling, banks have adopted their own internal guidelines in this regard. As in most parts of South Asia, it is common in Sri Lanka too for savings to be invested in gold jewellery as it is an easily accessible asset that is within the reach of middle and lower market segments of the population.
Another factor is that most pawned gold articles have a sentimental value, resulting in redemption, which is not entirely driven by the market value of the underlying gold.
Whilst acknowledging that the recent decline in the price of gold has impacted the credit quality of the pawning sector, the Sri Lanka Banks’ Association sees no cause for undue concern about any potential systemic risk arising from pawning exposure of banks.
The Association concurs with the view recently expressed by rating agency S&P’s that “in our base case scenario, we expect earnings of Sri Lankan banks to absorb the higher credit costs associated with pawning loans without any significant deterioration in their overall capital position”.
The Association stands ready to discuss with the regulator appropriate adjustments to risk metrics and submission of borrower default information relating to pawning advances.
