Thursday, 15 August 2013 00:32
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The recent fall in gold prices exposes Sri Lanka’s banking industry to the risk of a rise in nonperforming loans (NPLs) in the pawning (or gold-backed) loans segment. That’s according to a report, titled ‘Gold’s losing lustre reveals the cracks in Sri Lanka’s pawning segment’ that Standard & Poor’s Ratings Services published yesterday.
“We expect defaults in pawning loans to increase over the next 12 months unless gold prices stabilise,” said Standard & Poor’s Credit Analyst Geeta Chugh.
The report attributes the recent rapid growth in pawning loans in Sri Lanka to the steady rise in gold prices, the zero risk weight on pawning loans in the calculation of regulatory capital ratios, and the absence of restrictions on loan-to-value ratios.
Moreover, regulations do not require banks to submit the credit history of pawning borrowers to the Credit Information Bureau of Sri Lanka. This increases moral hazard, given that default does no harm to an individual’s credit history.
NPLs in the pawning segment have already started to rise. NPLs for the Sri Lankan banks that Standard & Poor’s analysed increased to 1%-5% of total loans as of 30 April, 2013, from less than 1% as of 31 December 2011.
“In our base-case scenario, we expect earnings of Sri Lankan banks to absorb the higher credit costs associated with pawning loans without any significant deterioration in their overall capital position,” said Chugh. “A sustained weakness in the gold prices could lead to unexpected losses. This could hurt banks’ capitalisation because they haven’t allocated any capital buffer for risk in the pawning business.”
Standard & Poor’s expects growth in pawning to be sluggish in 2013 because it understands that the Central Bank of Sri Lanka has advised banks to be cautious while expanding in this segment.
