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Aug 14, 2013 (LBO) - Defaults in Sri Lanka's gold-backed loans will grow and keeping defaulters out of a credit information system increases moral hazard by not discouraging default, an international credit rating agency said.
Standard & Poor's said in a report that defaults in gold-backed loans in banks covered by the agency was rising.
Gold-backed loans grew with rising gold prices, partly due to loose policy by the Federal Reserve which debased paper money, but prices started to collapse from late 2012.
S&P said in Sri Lanka gold-loans growth was also helped by a zero risk weight on capital and absence of restrictions on loan-to-value rations.
"Moreover, regulations do not require banks to submit the credit history of pawning borrowers to the Credit Information Bureau of Sri Lanka," the rating agency said.
"This increases moral hazard, given that default does no harm to an individual's credit history."
S&P said non-performing loans in gold loans were already rising. NPLs at banks analyzed by S&P rose to 1-5 percent as of April 30, from less than 1.0 percent in December 2011.
"We expect defaults in pawning loans to increase over the next 12 months unless gold prices stabilize," said Standard & Poor's credit analyst Geeta Chugh said in a statement.
The rating agency said pawning growth will be sluggish in part because the Central Bank had advised banks to be cautions.
"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 said.
"A sustained weakness in the gold prices could lead to unexpected losses. This could hurt banks' capitalization because they haven't allocated any capital buffer for risk in the pawning business."
Some banks have already started to make provisions for pawning losses. Sri Lanka's Hatton National Bank provide 1.5 billion rupees for credit losses this quarter, with around a quarter was related to gold-loans, an official said.
http://www.lankabusinessonline.com/news/sri-lanka-gold-backed-loans-defaults-to-grow:-s&p/1294217575
Standard & Poor's said in a report that defaults in gold-backed loans in banks covered by the agency was rising.
Gold-backed loans grew with rising gold prices, partly due to loose policy by the Federal Reserve which debased paper money, but prices started to collapse from late 2012.
S&P said in Sri Lanka gold-loans growth was also helped by a zero risk weight on capital and absence of restrictions on loan-to-value rations.
"Moreover, regulations do not require banks to submit the credit history of pawning borrowers to the Credit Information Bureau of Sri Lanka," the rating agency said.
"This increases moral hazard, given that default does no harm to an individual's credit history."
S&P said non-performing loans in gold loans were already rising. NPLs at banks analyzed by S&P rose to 1-5 percent as of April 30, from less than 1.0 percent in December 2011.
"We expect defaults in pawning loans to increase over the next 12 months unless gold prices stabilize," said Standard & Poor's credit analyst Geeta Chugh said in a statement.
The rating agency said pawning growth will be sluggish in part because the Central Bank had advised banks to be cautions.
"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 said.
"A sustained weakness in the gold prices could lead to unexpected losses. This could hurt banks' capitalization because they haven't allocated any capital buffer for risk in the pawning business."
Some banks have already started to make provisions for pawning losses. Sri Lanka's Hatton National Bank provide 1.5 billion rupees for credit losses this quarter, with around a quarter was related to gold-loans, an official said.
http://www.lankabusinessonline.com/news/sri-lanka-gold-backed-loans-defaults-to-grow:-s&p/1294217575
