THE MACROECONOMIC ENVIRONMENT
Banking Industry
Sri Lanka’s evolution from a low-income to a middle-income country has pushed up real income levels, driving continued growth in consumer demand for services. The services sector grew by an estimated 8.6% in 2011, contributing approximately to 58% of annual GDP. Within the sector, the banking, insurance and real estate industries constitute approximately 9% of GDP; combined, the three grew by an estimated 8% over the past year. This growth is largely attributable to improved macroeconomic conditions, as well as the increased demand for financial services prompted by low interest rates.Infrastructure
Twenty-four commercial banks now operate in Sri Lanka: two Government Banks, which account for the largest market share, along with 10 private sector banks and 12 foreign banks. Private sector banks control 40-45% of banking assets, while the 12 foreign banks possess about 10-15% of assets. There are also 76 financial service organisations operating in Sri Lanka; comprised of licensed specialised banks, licensed finance companies, specialised leasing companies and primary dealers.Three new banking licenses were issued in 2011 - one to Amana Bank, which specialises in Islamic banking; another to Axis Bank Ltd. of India; and a third, provisional license to a private sector group.
Several banking outlets have opened in the Northern and Eastern Provinces since the conclusion of the war in 2009. As a result, more people in those areas now enter formal banking streams and enjoy improved access to financial services. Banking outlets continue to be largely concentrated in the Western Province, although the area’s dominance is gradually receding.
Banking Industry Performance
Excess liquidity in the money market gradually declined in 2011. By year end, the total figure was under Rs. 10.0 Bn., down from Rs. 124.0 Bn. at the end of 2010.The Central Bank increased the Statutory Reserve Ratio to 8% in April 2011 from 7% to absorb excess liquidity from the market. The Central Bank also commenced overnight reverse repurchase auctions later in the year to
ease the pressure on tight liquidity and to contain pressure on interest rates. In an atmosphere of stiff industry competition, banks were able to maintain interest margins at satisfactory levels, although there was some tightening during the year.
The dwindling liquidity position in the banking system in 2011 is shown in the section on ‘Managing Risk At Commercial Bank’.
The banking industry’s total assets exceeded the Rs. 4.0 Tn. mark by November 2011, achieving an estimated growth rate of approximately 20% for the year. Banks recorded satisfactory capital adequacy ratios, well above the minimum level of 10%. Growth in the core capital was the largest contributor to capital base growth, while improved macroeconomic conditions helped to reduce the ratio of non-performing loans.
The Central Bank issued guidelines for an Integrated Risk Management (IRM) framework that documents risks faced by a bank, along with the management information and reporting mechanisms required to identify, mitigate and monitor such risks.
In conclusion, improved macroeconomic conditions have strengthened the overall soundness of Sri Lanka’s banking system, especially since the end of the war in 2009.
The dwindling liquidity position in the banking system in 2011 is shown in the section on ‘Managing Risk At Commercial Bank’.
Deposits and Advances
Lower interest rates across the industry led to a reduction in bank liquidity, especially in the second half of the year. Banking sector loans and advances increased significantly in 2011, in contrast to lower growth rates in deposits - a decrease also attributable to lower interest rates. The reduction in bank liquidity heightened pressure on interest rates, but the banking industry nevertheless recorded a growth in deposits of approximately 20% over the year.The banking industry’s total assets exceeded the Rs. 4.0 Tn. mark by November 2011, achieving an estimated growth rate of approximately 20% for the year. Banks recorded satisfactory capital adequacy ratios, well above the minimum level of 10%. Growth in the core capital was the largest contributor to capital base growth, while improved macroeconomic conditions helped to reduce the ratio of non-performing loans.
New Acts and Legislation during the Year
Sri Lanka’s banking system was strengthened in 2011 by the issuance of a Customer Charter to safeguard consumers of licensed banking services. The Central Bank encouraged licensed banks to commence Islamic banking operations. Chinese renminbi was specified as a designated currency for foreign exchange transactions.The Central Bank issued guidelines for an Integrated Risk Management (IRM) framework that documents risks faced by a bank, along with the management information and reporting mechanisms required to identify, mitigate and monitor such risks.
In conclusion, improved macroeconomic conditions have strengthened the overall soundness of Sri Lanka’s banking system, especially since the end of the war in 2009.