Sri Lanka's banking sector assets grew by 5.1% to Rs 20.4 trillion in 2023 mainly due to increased investments in government securities while the Non-Performing Loans (NPL) ratio was at 12.8% by the end of the year, Central Bank data showed.

According to the Monetary Policy report by the Central Bank of Sri Lanka (CBSL), despite the banking sector operating in a challenging environment during the financial year ended in December 2023, the total assets grew by 5.1% year on year to Rs. 20.4 trillion by the end of the year, mainly due to increased investments in government securities.

By the end of November 2023, the total investments in government securities by the banking sector stood at Rs 5.3 trillion, an increase of over 200% compared to the corresponding period in 2022.

However, the loans and receivables of the banking sector contracted by 2.8% during the year ending December 2023, amidst the tight monetary policy stance that was in place until June 2023. 

However, a gradual increase in credit was witnessed during the second half of 2023 with the easing of policy interest rates by the Central Bank while the NPL ratio remained at an elevated level of 12.8% at the end of December 2023 compared to the corresponding period of the previous year. 

The growth in Stage 3 loans has been decelerating since June 2023 with the expansion in loans and receivables, indicating a stabilisation of credit risk in the banking sector. 

“The sovereign-bank nexus remained elevated as the banking sector’s exposure to the Central Government and State-Owned Enterprises increased to Rs 9.0 trillion at the end of December 2023, particularly through investments in Rupee-denominated government securities.” CBSL said.

As a result, the report said that the liquid asset ratios of the banking sector significantly increased which was reflected by the expansion in the Statutory Liquid Assets Ratio of Domestic Banking Units to 44.9% at the end of December 2023 compared to 29.9% at the end of the corresponding period of the previous year.

Further, the report said that the Licensed Finance Companies (LFCs) sector recorded a contraction in its loans and advances portfolio in 2023, due to challenges in its core business of leasing and hire purchase. The asset quality of the sector deteriorated as indicated by the elevated Gross

The LFCs recorded a stage 3 loans ratio of 17.8% at the end of December 2023 compared to 17.4% in 2022 while the NPL to total loans ratio has recorded a deceleration from its highest level of 20.55 observed in May 2023, indicating an improvement in default risk during the second half of 2023. 

The liquidity position of the sector remained above the regulatory requirement, mainly due to increased investments in government securities. Capital adequacy of the sector improved with higher growth in regulatory capital compared to risk-weighted assets. 

However, there is a need for continued consolidation within the sector to ensure resilience, the report further noted.