Sri Lankan banking sector is facing the risks of managing asset quality and accessing capital in the face of rapid expansion, says a new report published by Fitch on the local Banking sector.
The report also points out, enhancing risk management capabilities, implementing changes in accounting standards in line with international norms, and managing the impact of global market instability are some of other risks faced by the local banks.
Fitch says, Sri Lankan banks experienced a surge in lending in 2010 and through 2011.
The Rating agency observes that in the absence of significant financial disintermediation, bank loans remain the dominant financial intermediary.
The Agency also says, the level of credit penetration remains low, indicated by loans/ GDP of about 36% at first half of 2011.
“Fitch believes that lending to SMEs is likely to increase in the current economic environment, although this could present challenges in terms of risk management” added a statement issued by the agency.
According to Fitch, tier 1 and total capital adequacy ratios for the local Banking sector has decreased to 13.4% and 14.9%, respectively, at the end of the first half of 2011.
Fitch says, recognizing the need for stronger capitalization; some banks have raised Tier 1 and Tier 2 capital during the second half of 2011.
The Rating report highlights that the Island’s banking sector is concentrated and dominated by the public-sector banks that accounted for about half of the sector assets at end-2010.
Fitch notes that the six largest banks have identified as systemically important accounted for 64% of sector assets at end-2010.
The full report on Sri Lanka’s Banking sector can be accessed by logging into www.fitchratings.com
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