ECONOMYNEXT - The outlook for banks in Sri Lanka remain stable but continued loan growth driven by construction credit may increase bad loans but the levels will not be high, Moody's Investors Services, a rating agency has said.
The stable outlook for banks, is better than the negative outlook given to Sri Lanka's B1, speculative grade long term rating.
Despite external funding challenges, the rating agency expects economic growth to remain stable at 5.0 percent in 2017, a marginal improvement over the 4.7 percent expected in 2016.
"Continued strong loan growth may put downward pressure on asset quality and liquidity conditions, but nonperforming loan (NPL) ratios will remain at low levels," says Srikanth Vadlamani, Vice President - Senior Credit Officer at Moody's.
"We therefore expect a degree of asset quality deterioration consistent with the current credit profiles of Sri Lankan banks."
Moody's says construction loans have been a key driver of a 16 percent loan growth up to September.
"The weakening in asset quality will come from a generally low 2.9 percent nonperforming loan ratio for the system at end-September 2016, which are close to the lowest level for the last decade," the rating agency said.
Sri Lanka is seeing a boom in apartment building, which has been given a further boost in the budget with foreigner allowed to buy apartments with domestic credit.
Other analysts have warned that a bubble may be developing in the sector.
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