Reality Time

Sept 18, 2007 (LBO) – Bad debts in Sri Lanka's banks are rising and loan to deposit ratios are deteriorating as the lagged effects of a credit bubble driven by loose monetary policy are beginning to be felt, the latest emerging data shows. Loan growth last year was 29 percent and has slowed slightly to 11 percent in the first half of 2007 (annualized to 22 percent if loans do not dip further in the second half) as the effects of central bank's recent efforts to slow credit growth is starting to show results.

Margins

Profitability in the sector is still good with banks raising their lending rates ahead of deposit rates and maintaining margins despite slower loan growth.

"Interest margins increased from about four percent in 2005 to 4.32 percent in 2006," says J Anandakumar, a banking analyst from Fitch Ratings Lanka, a credit rating agency that closely tracks the banking sector.

"This margin could be attributed to the fact that overall economic interest rates were high and as a result banks were charging more interest on the borrowers and not passing on as much of the benefits to the depositors.

"However this trend kind of reversed in the first half of 2007 where there was intense competition among banks t