Perhaps to calm a boiling banking industry over its assessment or in an apparent move to give greater clarity to its rational Standard and Poor’s has addressed some contentious issues to provide better read though Central Bank and Sri Lanka Bank Association have refuted the original report.
In a Credit Frequently Asked Questions (FAQ) titled “Understand Standard & Poor’s BICRA Assessment of Sri Lanka” the rating agency whilst stressing some of its core take homes, however had said BICRA is not an absolute measure of risk in any banking system.
“We scored Sri Lanka on various factors and sub-factors as per our BICRA methodology. Our assessment on these factors is on a pre-defined set of descriptors – such as “very low risk”, “low risk”, “intermediate risk”, “high risk”, “very high risk”, and “extremely high risk” – to reflect relativities in a globally consistent manner. Our criteria use these descriptors to enhance transparency and provide a basis for comparability among banking systems,” it added in response to the question “Does Standard & Poor’s view the Sri Lankan banking sector as “very high risk”?
For a poser “Does S&P’s assignment of BICRA group ‘8’ for Sri Lanka suggest the performance trend of the country’s banking industry?, S&P said it has just initiated coverage on the Sri Lankan banking industry. “The score of ‘8’ is not a reflection of either the deterioration or an improvement in performance of the banking industry. Instead, it reflects our opinion of where the Sri Lankan banking industry stands relative to other banking industries globally.”
With regard to how does the BICRA score of ‘8’ for Sri Lanka compare with that of other banking systems in emerging Asia?, S&P said “It is common and understandable for banking industries of emerging markets to rank lower on the BICRA than banking industries in developed countries.” “Typically, emerging economies have low income levels (per capita GDP of less than US$5,000) and their economic structure has many structural weaknesses. These economies also have underdeveloped institutions. These factors make them vulnerable to adverse developments, such as external shocks or internal imbalances,” S&P added.
The S&P’s FAQ also clarifies its observations regards to the Central Bank’s oversight of the EPF and the conflict of interest.
Whilst maintaining central bank is exposed to a potential conflict of interest, S&P however clarified that it has information of any specific incidences occurring. “We expect the central bank to have mechanisms to limit this risk. However, in our globally consistent assessment, we assess systems without such potential conflicts of interest as relatively less risky than those with,” the S&P’s FAQ added.
Though emphasising that the banking regulations and supervision are improving and the regulator has an adequate record of managing the financial sector, S&P said the regulation of finance companies is somewhat lax. Nevertheless S&P also noted “Additionally, the Sri Lankan Government is “supportive” of the banking industry and is committed to maintaining financial system stability and market confidence.”