May 26, Colombo: Moody's Investors Service says that the guarantee on pawning loans proposed by the Central Bank of Sri Lanka will support the weak quality of pawning loans of banks.
The Monetary Board of Sri Lanka's Central Bank has approved the implementation of a Credit Guarantee Scheme on behalf of the Government for pawning advances granted by licensed banks, in order to support lending against gold articles.
"Although the government's details on the mechanism are scant at this stage, we estimate that a partial guarantee is more likely because of the government's constrained fiscal capacity and the history of government guarantees," Nick Caes, a Moody's Associate Analyst has said.
Caes said even a partial guarantee would be credit positive for Sri Lanka's banks because it will support the currently weak quality of their pawning loans. Pawning loans constitute a substantial part of the recent increase in banks' nonperforming loans.
Although the new guarantee scheme will focus only on new pawning loans, Moody's expects that the scheme will allow existing borrowers to refinance their pawning loans, perhaps even at a lower rate, leading to improvements in the quality of the asset class for the banks.