Sri Lanka's two state banks are bracing for a possible financial crisis after being directed by the cash-strapped government to lend more than Rs 180 billion to cushion steep losses of state enterprises including the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB). Losses have been mounting in these two institutions owing to high crude oil prices in the world market and the depreciation of the rupee, official sources said.
About $800 million is needed in the next three months for oil bill interventions alone while more is required for other costs, they said.
The sources said the maximum loans that state enterprises could get is about Rs 100 billion a year from the Bank of Ceylon (BoC) and the People's Bank (PB). But under current plans, domestic bank borrowings is seen rising to over Rs. 180 billion from the budgeted amount of Rs.64 billion in 2012.
However even these new targets would be difficult to maintain if crude remains at $115 to $120 a barrel this year. The CPC would lose Rs. 63.68 billion even after the increase in tariff, a senior Finance Ministry official said. "If we did not increase tariffs the CPC would have lost 188.46 billion rupees in 2012," he revealed.
Local bank borrowings have increased by a staggering 280% to Rs. 160 billion in 2011 from a budgeted Rs 42 billion, the official said.
The Finance Ministry expects an increase in market interest rates over the next 12 months due to the slowdown in deposit mobilisation in the banking sector and depreciation of the rupee, he said.
The BoC is targetting a bank balance of Rs 1 trillion by the end of 2012. Its total asset base is Rs.779 billion, deposit base - Rs. 563 billion and net loans given - Rs. 440 billion. People's Bank's total assets are Rs. 547 billion, total loans and advances have swelled to Rs. 372 billion while the deposit base is Rs, 462 billion.
Explaining the crisis if the banks are to lend this huge amount to the government, the official said bad loans will damage the banks' balance sheet and then depositors will want to withdraw their deposits. The government that is borrowing from the banking system at this rate is not only adding to intense inflationary pressures, keeping the interest rates high, crowding out the private sector, and mortgaging the economic future of the next generation but also getting itself into a domestic debt trap; a situation in which it will get in a spiral of ever-increasing bank borrowing to service and repay the previous debt, economic analysts said.
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