INSUBCONTINENT EXCLUSIVE:
Bank holdings of Sri Lanka Development Bonds (SLDBs), which are foreign-currency denominated but governed by local law, will be affected, as
The proposal also includes a restructuring of foreign-currency bank loans to the government (less than 1% of combined assets for Fitch-rated
banks), though without detailed plans.The government has outlined three treatment options for SLDBs
We expect banks will generally opt for the choice involving conversion of such debt into local currency-denominated instruments; banks have
so far opted to convert maturing SLDBs to rupee-denominated treasury bonds since the announcement of suspension of foreign debt servicing in
April 2022.Provisioning should help to moderate the hit to bank capital from the debt treatment
Fitch-rated Sri Lankan banks have already made provisions of 35% or higher for ISBs, with SLDBs being subject to lower provisioning due to
the possibility of obtaining rupee-denominated treasuries.Nonetheless, worsening impaired loans (end-May 2023: 13.3% of system loans, from
1Q22: 8.4%) in line with the economic stress associated with the sovereign default and the unwinding of forbearance provided during the
local-currency obligations is likely to trigger a loss of depositor confidence in the banking system, based on the proposed plans
Long-Term Local-Currency Issuer Default Rating would not automatically drive a downgrade in Sri Lankan bank ratings
some way towards resolving uncertainties over Sri Lankan bank ratings, many risks remain
If not, the risk of further domestic debt restructuring could linger, resulting in further instability for the banking sector.--Fitch
