Struggling small businesses
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It was one of those days when the trio didn’t meet under the margosa tree for their weekly conversation which often inspires many a column piece.Serapina had gone back to the village to inquire into one of her relatives who was stranded in West Asia, one among several domestic workers who had gone on ‘visit’ visas to secure jobs and fallen into trouble. Mabel Rasthiyadu was occupied with cooking at the residence she works in while Kussi Amma Sera was preparing breakfast.
It was also one of those days when a call from a friend triggered a thought process that led to ideas for a column. It was on Wednesday morning, the day before I prepare my column, that Arty, the intrepid entrepreneur, called to discuss what he felt was a serious issue. “Have you followed the balance sheets of the state and private banks these days?”
he asked.
“Not really,” I replied. “Well they have set aside huge sums for bad loans, largely because small businesses are collapsing and unable to service their debt,” he said.
“Well… SMEs (small and medium scale businesses) have been having a hard time during the COVID-19 pandemic and the economic crisis this year. That’s not surprising,” I said. “Well if you examine their accounts, the findings are startling and extremely worrying,” he said.
“That’s right because it provides some clues to the extent
to which small businesses are suffering,” I said, ending
the conversation.
On the same day, I spent some time scrutinising the accounts of a number of banks – for the latest quarter (nine months to September 2022), all whose balance sheets are available on the Colombo Stock Exchange as they are listed entities. The results were not surprising.
Banks and large corporates are also worried that the
crisis will escalate into next year as many companies, particularly SMEs, are struggling. When one section of the business community suffers, it impacts every institution engaged in business.
This is particularly at a time when the economy is expected to contract (negative growth) by 7-8 per cent this year and 3-4 per cent next year, according to the Central Bank. The queues for fuel and LPG may have ended but the economic crisis continues. Another looming problem for the business community is the plan to hike electricity rates or face stifling 6-7 hour power cuts next year, according to the Power and Energy Ministry.
Here is a sample of results of banks dealing specifically with ‘provisioning (or allowances) for bad loans:
Commercial Bank: Impairments costs have tripled for the nine months ended 30th September 2022 and reduced profits for the quarter as well as the year to date compared to the corresponding periods of last year. Impairment charges and provisions for other losses for the nine months amounted to Rs.52.272 billion, reflecting an increase of Rs.34.274 billion or 190.44 per cent from Rs.17.997 billion recorded for the corresponding nine months of 2021.
NDB Bank: The bank set aside Rs.22.2 billion as impairment charges for the period under review, a phenomenal 234 per cent increase over the comparative period. The greater portion of impairment charges continued to comprise provisions made for foreign currency-denominated government securities, factoring in the revisions to the sovereign rating of the country earlier this year on account of the country’s debt restructuring measures and the impact arising from rupee depreciation.
Pan Asia Bank: The bank increased its provision for loan losses during the period under review by introducing changes to impairment models, taking into consideration increased risks and uncertainties emerged due to the turbulent economic conditions in the country. The impairment expense for the reporting period includes provisions made on foreign currency exposures to the Government of Sri Lanka and amounted to Rs.1.58 billion.
Sampath Bank: The bank, amidst a drop in profits owing to the country’s economic downturn, has increased its total impairment charge to Rs.48.8 billion for the 9-months to 30th September 2022, a 396 per cent increase from the Rs.9.8 billion charge reported in the previous year.
HNB Bank: The 110 per cent increase in total operating income to Rs.99.7 billion was negated by the 438 per cent increase in total impairment charge to Rs.60.3 billion for the nine months. This included an impairment charge of Rs.41 billion on account of the investments in foreign currency denominated government securities held by the bank.
Bank of Ceylon: The impairment provision made to compensate the ECL (expected credit loss) from loans and advances amounted to Rs.65.3 billion during the nine-month period ended 30 September 2022, while the provision made for 3Q 2022 amounted to Rs.15.8 billion.
The crisis facing Sri Lankan businesses was also discussed at various forums at this week’s Economic Summit hosted by the Ceylon Chamber of Commerce. Among the key challenges of the country’s economy are how to turn around the dwindling fortunes of loss-making state-owned enterprises (SOEs) and this was discussed at length and the fact that they are a huge drain on Sri Lanka’s meagre earnings (largely through tax income).
The moratoriums on loans for various sectors, in particular small businesses and tourism ventures, are also draining the banks since the debtors are desperately seeking more time to service loans.
On the flipside, seasonal buying, for Christmas and the New Year, seems to be improving this year after more than two years of negative sentiment largely due to the pandemic and related issues. While city (Colombo) hotels are reporting favourable banquet and restaurant business, outstation resorts are having weekends filled with locals while tourism, as a whole, is picking up. Sri Lanka is expected to end the year with slightly below 800,000
tourists this year.
As I wound up my column, Kussi Amma Sera brought a ‘maalu paan’ (purchased from Aldoris) and a mug of tea while I pondered on the pain suffered by banks during this crisis period. Of course, naysayers will say the banks are minting money so a few losses here and there won’t dent their balance sheet. That may be true but the somewhat negative balance sheets is reflective of the crisis that Sri Lankan businesses are facing these days.
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