The Central Bank has proposed significant changes to the single borrow limit, with potential impacts on both smaller and larger banks.
The current system, tied to total capital and reaching up to 32%, is set to undergo a substantial reduction to 25%, now linked to Tier 1 capital.
National Development Bank CEO Dimantha Seneviratne shared his views on the proposed changes, acknowledging the potential impact on the industry.
They highlight a potential opportunity for non-banking conglomerates as exposure caps are reached, allowing them to join larger groups. Seneviratne said, “Corporations would like to be working within three-four as the optimum level of banks. That’s something that we have to manage and it would create some impact going forward to the industry.” Seneviratne was speaking on November 29 at the NDB Investor 2023 Q3 webinar.
This adjustment, slated to take effect from the middle of next year, represents a more conservative approach, particularly in defining groups. The three-year timeframe for implementation aims to ease the transition, but its effects are expected to reverberate across the banking sector. Smaller banks may face challenges due to the reduced single borrower exposure, impacting their lending capacities. On the other hand, larger banks will also experience limitations, leading to a reshuffling of exposures within the industry.
However, this shift could prompt conglomerates to rethink their banking partnerships, possibly leading to a consolidation of relationships with a few key banks. This strategic decision-making process poses both challenges and opportunities for banks, requiring careful management and adaptation to the evolving regulatory landscape. As the industry prepares for these changes, collaboration between financial institutions and regulatory bodies will play a crucial role in ensuring a smooth transition.
Seneviratne categorized impairments into two types – those related to the investment portfolio and those tied to the lending portfolio. For investments in Sri Lanka Development Bonds (SDBs), the bank had prudently built provisions, even though some reversals occurred due to the replacement of assets with rupee bonds. In contrast, impairments related to sovereign bonds were aligned with market standards. Seneviratne expressed optimism about potential impairment reversals in the future, particularly if optimization and restructuring initiatives are announced. However, he emphasized the difficulty in making definitive projections without knowledge of the specific restructuring program.
Discussing loan impairments, Seneviratne highlighted the substantial provisions made by the bank and the sizable reserve created. He indicated that as the economy picks up, there could be reductions in these impairments, especially in sectors demonstrating credit improvement. Seneviratne pointed to ongoing recovery efforts and positive legal developments that could facilitate negotiations with customers for solutions. (TP)
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