The Central Bank of Sri Lanka (CBSL) has released its Financial Stability Review for 2024, as mandated by Section 70(1) of the Central Bank of Sri Lanka Act, No. 16 of 2023. This report assesses the stability of the financial system, identifies associated risks and vulnerabilities, and outlines policy measures taken by the CBSL and other regulatory authorities. It encompasses data up to June 2024, with additional updates on selected developments.
Key Findings and Outlook
- Financial System Performance: The report indicates that the financial system is expected to improve, driven by better asset quality and capital buffers, as the economy stabilizes despite ongoing challenges. The CBSL noted that while the crisis had created significant macro-financial imbalances, these are gradually being rectified through prudent policies and reforms
- Economic Recovery: An anticipated increase in economic output is expected to boost demand for financial services, contributing to improved financial intermediation. However, as credit shifts towards the private sector, financial institutions must manage potential pressures on credit quality and capital adequacy due to elevated non-performing loan (NPL) ratios
- Profitability Concerns: The report highlights that while profitability in the banking sector has improved—largely due to a rise in net interest income—challenges remain. Low deposit rates may hinder fund attraction, and ongoing downward pressure on lending rates could compress net interest income, affecting overall profitability
- Sovereign Exposure: Financial institutions face high levels of sovereign exposure through government securities, which have yielded significant returns but may decrease over time. Adjustments in external and fiscal sector imbalances will need careful management to maintain financial stability
Strategic Recommendations
The CBSL emphasizes the importance of sustaining fiscal consolidation and managing external sector imbalances while maintaining low inflation levels to foster a conducive environment for economic growth. It also warns that increased risk-taking during an expansionary credit cycle could exacerbate vulnerabilities within the financial sector
To mitigate these risks, the CBSL and the Financial System Oversight Committee will continue to monitor systemic risks and recommend necessary macroprudential policies. Stakeholders are urged to commit to timely and well-sequenced policy measures to ensure sustained financial stability moving forward
The full electronic version of the Financial Stability Review can be accessed on the Central Bank’s website.
