Reality check on Lankan banking sector by IMF Rep. Mathai

By Uditha Jayasinghe

Giving a reality check on Sri Lanka’s banking industry, the International Monetary Fund (IMF) Head said that the industry needs to work harder to consolidate at global level and participate in growth by giving long-term loans and other services.

IMF Resident Representative Koshy Mathai, addressing the forum on how Sri Lanka’s banking system fares against an international comparison, pointed out that the sector still needs to grow, show larger balance sheets, and address the relative lack of long term finance.

Despite strong growth in 2010 and 2011, he pointed out that inflation still needs to reduce further and the country remains a fiscal outlier, which means that fiscal deficit compared with public debt as the percentage of GDP still puts Sri Lanka at a vulnerable point when compared with similar nations.

He praised the Government for improving the Balance of Payment aspect so that the country is set for more sustainable growth, despite the painful effects. He commended the banking industry for maintaining healthy levels of capital adequacy, asset quality, and profitability, with a high number of banks and bank branches in relation to the population.

But there was less good news on the size of the industry in relation to the economy, small balance sheets, and shortcoming in providing long-term finance.

“Providing long-term finance is made all the more problematic by the undeveloped state of the corporate bond market and the stock market. Sri Lanka’s banks cannot use this as an excuse, however, because countries such as the Philippines that also do not have a corporate bond market still manage to rank high on long-term loans,” he said.